How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe

Viral Acharya, Matteo Crosignani, Tim Eisert and Christian Eufinger

No 31790, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D84 E31 E58 L11 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-eec and nep-mon
Note: AP IFM ME
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