Working Paper: CEPR ID: DP18530
Authors: Viral Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
Abstract: We document how the interaction of supply-chain pressures, heightened household inflation expectations, and firm pricing power contributed to the pandemic-era surge in consumer price inflation in the euro area. Initially, supply-chain pressures increased inflation through a cost-push channel and raised inflation expectations. Subsequently, the cost-push channel intensified as firms with high pricing power increased product markups in sectors witnessing high demand. Eventually, even though supply-chain pressures eased, these firms were able to further increase markups due to the stickiness of inflation expectations. The resulting persistent impact on inflation suggests supply-side impulses can generalize into broad-based inflation via an interaction of household expectations and firm pricing power.
Keywords: inflation expectations; market power; supply chain; euro area; generalized markup shock
JEL Codes: E31; E58; D84; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Supply chain pressures (L99) | CPI growth (E31) |
| Supply chain constraints (L91) | Higher prices for consumer goods (E31) |
| Heightened household inflation expectations (D19) | Broader inflation (E31) |
| Supply chain constraints (L91) | Heightened household inflation expectations (D19) |
| Inflation expectations (E31) | Firms' pricing strategies (L11) |
| Firms' pricing power (L11) | Increase in markups (D49) |
| Supply chain pressures (L99) | Generalization of inflation (E31) |
| Household expectations (D19) | Generalization of inflation (E31) |
| Firm behaviors (D21) | Generalization of inflation (E31) |