A Time Series Analysis of Determinants of PCE Inflation in the United States

This paper investigates the factors contributing to the PCE inflation rate in the United States. The study incorporates economic determinants in a time series analysis to examine the influence of economic variables on the PCE Inflation rate in the United States. The economic variables include the unemployment rate, wages, inflation expectations, the federal funds rate, the money supply, import prices, and the labor force participation rate. The ADF unit root test shows that the first difference is stationary while the Johansen test of cointegration shows that there is cointegration of 7 and that a vector error correction model (VECM) must be run. The results show that there is long run causality among the variables of PCE inflation, output per person, import price of commodities, the labor force participation rate, wages, and GDP. Diagnostics of the VECM show that there is no autocorrelation, and the residuals of the overall model are not normally distributed