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How do supply shocks to inflation generalize? Evidence from the pandemic era in Europe

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  • Acharya, Viral
  • Crosignani, Matteo
  • Eisert, Tim
  • Eufinger, Christian

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.

Suggested Citation

  • Acharya, Viral & Crosignani, Matteo & Eisert, Tim & Eufinger, Christian, 2023. "How do supply shocks to inflation generalize? Evidence from the pandemic era in Europe," CEPR Discussion Papers 18530, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18530
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    2. Michalis Nikiforos & Simon Grothe & Jan David Weber, 2024. "Markups, profit shares, and cost-push-profit-led inflation," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 33(2), pages 342-362.
    3. Jeworrek, Sabrina & Tonzer, Lena, 2024. "Inflation concerns and green product consumption: Evidence from a nationwide survey and a framed field experiment," IWH Discussion Papers 10/2024, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    Inflation expectations; market power; Supply chain; Euro-area; generalized markup shock;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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