How do supply shocks to inflation generalize? Evidence from the pandemic era in Europe

Viral Acharya, Matteo Crosignani, Tim Eisert and Christian Eufinger

No 18530, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We document how the interaction of supply chain pressures, elevated household inflation expectations, and firm pricing power contributed to the pandemic-era surge in consumer price inflation in the euro area. Initially, supply chain disruptions raised inflation, particularly in manufacturing sectors through a cost-push channel, while also elevating inflation expectations. In turn, higher inflation expectations appear to have lowered the price elasticity of consumer demand and strengthened firms' pricing power, enabling even firms in service sectors, that were initially unaffected by supply constraints, to raise markups. Through this expectations mechanism, localized inflation in sectors sensitive to supply-side shocks generalized into broad-based inflation.

Keywords: market; power (search for similar items in EconPapers)
JEL-codes: D84 E31 E58 L11 (search for similar items in EconPapers)
Date: 2023-10
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Related works:
Working Paper: How Do Supply Shocks to Inflation Generalize? Evidence From the Pandemic Era in Europe (2025)
Working Paper: How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe (2023)
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