Working Paper: NBER ID: w27663
Authors: Sebastian Heise; Fatih Karahan; Ayegl Ahin
Abstract: Price inflation in the U.S. has been sluggish and slow to pick up in the last two decades. We show that this missing inflation can be traced to a growing disconnect between unemployment and core goods inflation. We exploit rich industry-level data to show that weakening pass-through from wages to prices in the goods-producing sector is an important source of the slow inflation pick-up in the last two decades. We set up a theoretical framework where markups and pass-through are a function of firms' market shares and show that increased import competition and rising market concentration reduce pass-through from wages to prices. We then use industry-level data and find strong support for these two channels consistent with the implications of our model.
Keywords: Inflation; Wage-Price Passthrough; Market Concentration; Import Competition
JEL Codes: E24; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising import competition (F69) | decline in passthrough from wages to prices (J39) |
| increased market concentration (L11) | decline in passthrough from wages to prices (J39) |
| declining passthrough from wages to prices (J39) | missing inflation in the US (E31) |
| foreign firms account for a larger market share (F23) | fewer firms experience wage shocks (J39) |
| fewer firms experience wage shocks (J39) | lower passthrough from wages to prices (J39) |
| higher market shares and concentration (L11) | lower passthrough rates (H29) |
| market structure influences passthrough rates (L11) | decline in passthrough from wages to prices (J39) |