Decomposing Supply and Demand Driven Inflation

Adam Shapiro

No 2022-18, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The extent to which either supply or demand factors drive inflation has important implications for economic policy. I propose a framework to decompose inflation into supply- and demand-driven components. I generate two new data series, the supply and demand-driven contributions to personal consumption expenditures (PCE) inflation, which quantify the degree to which either demand or supply is driving inflation in a current month. The series show expected time-series patterns. The demand-driven contribution tends to decline during recessions, while the supply-driven contribution tends to follow food and energy prices. Monetary policy tightening acts to reduce the demand-driven contribution of inflation. Oil-supply shocks act to increase the supply driven contribution, but decrease the demand-driven contribution of inflation. The decompositions can be used to test theory or by policymakers and practitioners to track inflation drivers in real time.

Keywords: supply and demand; inflation; decomposition (search for similar items in EconPapers)
Pages: 35
Date: 2022-09-22
New Economics Papers: this item is included in nep-cba, nep-ene and nep-mon
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:94836

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DOI: 10.24148/wp2022-18

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