Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications

Melih Firat and Otso Hao

No 2023/205, IMF Working Papers from International Monetary Fund

Abstract: What are the contributions of demand and supply factors to inflation? To address this question, we follow Shapiro (2022) and construct quarterly demand-driven and supply-driven inflation series for 32 countries utilizing sectoral Personal Consumption Expenditures (PCE) data. We highlight global trends and country-specific differences in inflation decompositions during critical periods such as the great financial crisis of 2008 and the recent inflation surge since 2021. Validating our inflation series, we find that supply-driven inflation is more reactive to oil shocks and supply chain pressures, while demand-driven inflation displays a more pronounced response to monetary policy shocks. Our results also suggest a steeper Phillips curve when inflation is demand-driven, holding significant implications for effective policy design.

Keywords: Inflation decomposition; demand vs supply; Phillips curve; monetary policy; supply chain pressures; supply decomposition of inflation; demand-driven inflation; supply-driven inflation; decomposition analysis; inflation decomposition methodology; Inflation; Supply shocks; Oil production; Output gap; Oil prices; Global; Asia and Pacific; Europe (search for similar items in EconPapers)
Pages: 43
Date: 2023-10-17
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn and nep-mon
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