Are the Demand and Supply Channels of Inflation Persistent? Evidence from a Novel Decomposition of PCE Inflation

Viacheslav Sheremirov

Current Policy Perspectives from Federal Reserve Bank of Boston

Abstract: Using highly disaggregated personal consumption expenditures data, I analyze whether the recent inflation run-up is explained by supply shocks more than by demand shocks, and whether these demand and supply shocks are likely persistent or transitory. I develop a new decomposition method that enables me to classify inflation in disaggregated consumption categories as being driven predominantly by persistent supply shocks, transitory supply shocks, transitory demand shocks, or persistent demand shocks. Similar to other recent analyses, this brief finds that both demand and supply shocks are responsible for the recent inflation run-up, and that quantitatively, supply shocks have played a larger role than demand shocks. However, while supply shocks are classified as mostly transitory, for much of the recent period the demand shocks had a relatively large persistent component. In light of these results, I briefly discuss how the sources of inflation and their persistence can affect the monetary policy response to inflation and the likelihood of achieving a soft landing.

Keywords: inflation persistence; demand and supply shocks; sectoral decomposition (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 15
Date: 2022-11-07
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (1)

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