Understanding trend inflation through the lens of the goods and services sectors

Summary We distinguish between the goods and services sectors in an unobserved components model of U.S. inflation. We find that prior to the early 1990s, both sectors contributed to volatility of aggregate trend inflation, while since then, this has been predominantly driven by the services sector, with the trend in goods inflation being essentially flat. We document that the large reduction in the volatility of the trend for goods inflation has been the most important driver of the decline in the volatility in aggregate trend inflation reported by Stock and Watson (2007). Our results appear robust to COVID‐19 inflation developments.