The Role of Production Networks in Price Stability

Samuel Stockman

Economics Working Paper Archive from Levy Economics Institute

Abstract: Between the pandemic and the war in Iran, inflation has become a central issue facing the US economy that is compounding a broader affordability crisis. However, the sector-specific nature of these recent inflationary episodes means that movements in the price level are not evenly distributed and statistics such as consumer price indexes aggregate away meaningful information. These index movements present inflation as an aggregate process when it can be better understood as a structural feature of the economy facilitated by its production networks. This article builds on a new literature using input-output price models to simulate the relative price movements that result from sector-specific price shocks to demonstrate that inflationary processes entail relative price shifts as both their cause and their consequence. It is argued that these relative price movements begin in systemically significant upstream industries and propagate through production networks to produce differential price outcomes that are not captured by price indexes. The conclusions of this article refine the classification of the systemically significant industries found in Weber et. al (2024a) by clarifying the differential relative price movements from a set of systemically significant industries. The implication of these findings is that monetary policy cannot adequately address the causes of recent inflationary episodes and instead policies that target the structural features of the economy are necessary.

Keywords: Inflation; Production Networks; Input-Output Analysis; Relative Prices; Price Stability (search for similar items in EconPapers)
JEL-codes: C67 E31 E52 E62 (search for similar items in EconPapers)
Date: 2026-06
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