Supply Drivers of US Inflation Since the COVID-19 Pandemic

Serdar Kabaca and Kerem Tuzcuoglu

Staff Working Papers from Bank of Canada

Abstract: This paper examines the contribution of several supply factors to US headline inflation since the start of the COVID-19 pandemic. We identify six supply shocks using a structural VAR model: labor supply, labor productivity, global supply chain, oil price, price mark-up and wage mark-up shocks. Our shock identification relies mainly on sign restrictions. But for the global supply chain shock, we propose a new identification scheme combining sign, narrative and variance decomposition restrictions. Historical decomposition results suggest that global supply chain and oil price shocks are the biggest supply contributors to the US inflation during the pandemic. In contrast, labor shortages only mildly contribute to inflation, but their impact on output is larger in that period. Additionally, price and wage mark-up shocks start to significantly contribute to inflation only towards the middle of 2022. Finally, our analysis, which also allows the identification of monetary policy and aggregate demand shocks, suggests that demand and supply factors are almost equally responsible for the movements in the inflation rate during the pandemic.

Keywords: Business fluctuations and cycles; Econometric and statistical methods; Inflation and prices (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2023-03
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-19

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