Authors: Richard W. Peach, Robert Rich, and Alexis Antoniades

• For decades, the prices of services have tended to increase faster than the prices of goods. Since the late 1990s, though, the gap between services inflation and goods inflation has expanded to a record level and become very persistent as services inflation has remained relatively high while goods prices have in fact been falling.
  
  
• The widening gap between services and goods inflation has led to mostly negative views of the near-term outlook for U.S. inflation. Some observers contend that continued rapid increases in services prices will result in faster overall inflation, while others argue that the progressively steeper decline of goods prices points to a falling overall price level, or deflation.
  
  
• This article examines the relationship between goods inflation and services inflation from 1967 to 2002. The specific inflation series modeled by authors Peach, Rich, and Antoniades is the quarterly change of the core personal consumption expenditures (PCE) deflator, or the PCE deflator excluding its food and energy components.
  

• The authors find that over the past thirty-five years

• core PCE services inflation and core PCE goods inflation have experienced permanent increases and reductions; however, because shifts in the two measures have moved roughly in tandem, they suggest a stable gap, and that
  
  
• when the gap between services and goods inflation is above its long-run value, as it currently is, equilibrium is restored through a rise in goods inflation and a slowing of services inflation.
  

• The results obtained by Peach, Rich, and Antoniades provide little or no support for concerns that a marked acceleration or a dramatic slowing in inflation is imminent.

Richard W. Peach is a vice president and Robert Rich a senior economist at the Federal Reserve Bank of New York; Alexis Antoniades, formerly a research associate at the Bank, is a graduate student in economics at Columbia University.

The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.