When Inflation Takes Hold: Labor-Market Pressure and Price Transmission

Elton Beqiraj, Mirabela Bika and Giovanni Di Bartolomeo ()

No 208, CIMEO Working Paper Series from Centre for Investigation and Modelling of Experimental Observations (CIMEO)

Abstract: This paper develops and estimates a state-dependent Phillips curve in which labor-market pressure and price adjustment jointly determine when an inflationary disturbance becomes aggregate inflation. Tight labor markets select a wage branch that raises marginal-cost pressure, while the level and age profile of price adjustment determine how rapidly that pressure reaches prices and how long its effects survive. This interaction generates an inflation impact-persistence frontier. The pricing state with the strongest immediate pass-through need not be the state with the longest-lived response. Estimated on U.S. quarterly data, the model locates postwar inflation surges in a high-pass-through pricing environment and finds inflation most vulnerable when that environment coincides with strong labor-market pressure. Bayesian evidence favors the joint state structure over specifications that suppress either its labor-pressure margin or its pricing-state margin.

Keywords: Inflation dynamics; nonlinear Phillips curve; labor-market tightness; pass-through; inflation surges; state-dependent Phillips curves (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 J64 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00208

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