What drives inflation? Disentangling Demand and Supply Factors

Sandra Eickmeier and Boris Hofmann

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We estimate indicators of aggregate demand and supply conditions based on a structural factor model using a large number of inflation and real activity measures for the United States. We identify demand and supply factors by imposing theoretically motivated sign restrictions on factor loadings. The results provide a narrative of the evolution of the stance of demand and supply over the past five decades. The most recent factor estimates indicate that the inflation surge since mid-2021 has been driven by a combination of extraordinarily expansionary demand conditions and tight supply conditions. We obtain similar results for the euro area, but with a somewhat greater role for tight supply consistent with the greater exposure of the euro area to recent adverse global energy price shocks. We further find that tighter monetary policy and financial conditions dampen both demand and supply conditions.

Keywords: inflation; aggregate demand and supply; factor model; sign restrictions; monetary policy (search for similar items in EconPapers)
JEL-codes: C3 E3 E5 E6 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2022-12
New Economics Papers: this item is included in nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://cama.crawford.anu.edu.au/sites/default/fil ... ickmeier_hofmann.pdf (application/pdf)

Related works:
Working Paper: What drives inflation? Disentangling demand and supply factors (2023)
Working Paper: What drives inflation? Disentangling demand and supply factors (2022)
Working Paper: What drives inflation? Disentangling demand and supply factors (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2022-74

Access Statistics for this paper

More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Cama Admin ().