Consumer preferences and inflation diffusion

Christian Glocker and Philipp Piribauer

Macroeconomic Dynamics, 2025, vol. 29, -

Abstract: We study how consumer preferences affect the transmission of microeconomic price shocks to consumer price index (CPI) inflation. These preferences give rise to complementarities and substitutions between goods, generating demand-driven cross-price dependencies that either amplify or mitigate the impact of price shocks. Our results demonstrate that while both effects are present, positive spillovers due to complementarities dominate. The magnitude of these cross-price effects is significant, demonstrating their importance in shaping CPI inflation dynamics. Most importantly, demand-driven price linkages decisively shape the impact of producer prices on CPI inflation. These findings underscore the need to take into account demand-driven price dependencies when assessing the impact of price shocks on CPI inflation, rather than relying solely on supply-related ones.

Date: 2025
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