Common and Idiosyncratic Inflation

ABSTRACT We disentangle price changes due to economy‐wide shocks from those driven by idiosyncratic shocks by estimating a two‐regime dynamic factor model with dynamic loadings on a new large dataset of finely disaggregated monthly personal consumption expenditures price inflation indexes from 1959 through 2024. We find that up to the mid‐1990s and after the COVID‐19 pandemic, common shocks were the primary driver of US inflation dynamics and had long‐lasting effects. In contrast, in the intermediate period, idiosyncratic shocks were the main driver, and common shocks had short‐lived effects.