Services inflation dynamics and persistence puzzle in Brazil: a time-varying parameter approach

ABSTRACT

This article analyses services inflation dynamics in Brazil, focusing on the Services Inflation Persistence Puzzle, for monthly data from January 2004 to February 2016. We apply a time-varying parameter (TVP) approach, via a Kalman filter, to estimate hybrid Phillips curves and compare inflation inertia for tradable goods and services inflation. Aggregate Brazilian Extended Consumer Price Index inflation serves as a benchmark. To justify the TVP analysis, parameter instability and structural change tests are implemented, based on OLS and Generalized Method of Moments (GMM) frameworks. The main results are as follows: (i) the TVP approach is relevant due to observed instability in some parameters estimated; (ii) inflation expectation coefficients are higher than lagged inflation in all calculations, but inflation inertia is not negligible at all; (iii) services inflation persistence ranges from 27 to 36%, whereas tradable goods inflation persistence ranges from 36 to 47%, providing evidence of the Services Inflation Persistence Puzzle in Brazil; (iv) from 2009 onwards an increase in one percentage point in real wages raises monthly services inflation rate by 0.02 to 0.03 percentage point; (v) there is evidence that cost-push pressures, due to wage increases in the service sector, are more important to explain services inflation than demand pressures from early 2009 to mid-2014.

KEYWORDS:

• Services inflation
• Phillips Curve
• time-varying parameter
• Brazil

JEL CLASSIFICATION:

• C22
• C32
• E31

Acknowledgments

The authors thank CAPES, CNPq and FAPEMIG for financial support.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the Conselho Nacional de Desenvolvimento Científico e Tecnológico - CNPq [306426/2016-1]; Coordenação de Aperfeiçoamento de Pessoal de Nível Superior - CAPES [88881.172107/2018-01]; Fundação de Amparo à Pesquisa do Estado de Minas Gerais - FAPEMIG [PPM-00445-17].