Working Paper: NBER ID: w31790
Authors: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
Abstract: We document how supply-chain pressures, household inflation expectations, and firm pricing power interacted to induce 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: Supply shocks; Inflation; Pandemic; Pricing power; Expectations
JEL Codes: D84; E31; E58; 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) | Increased inflation (E31) |
| Increased inflation (E31) | Inflation expectations (E31) |
| Supply chain pressures (L99) | Localized inflation (E31) |
| Localized inflation (E31) | Generalized inflation expectations (E31) |
| Generalized inflation expectations (E31) | Overall inflation rates (E31) |
| Supply chain constraints (L91) | Producer price index (PPI) growth (E31) |
| Supply chain constraints (L91) | Consumer price index (CPI) growth (E31) |
| Higher inflation expectations (E31) | Firms maintain/increase markups (L11) |
| Supply-side shocks (E65) | Persistent rise in inflation (E31) |