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 C.E.P.R. Discussion Papers

Abstract: We document how the interaction of supply-chain pressures, heightened household inflation expectations, and firm pricing power contributed to 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.

Keywords: Inflation expectations; market power; Supply chain; Euro-area; generalized markup shock (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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Working Paper: How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe (2023)
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