Year: 2022
Type: article
Abstract: The extent to which either supply or demand factors drive inflation has important implications for economic policy. I propose a framework to decompose inflation into supply- and demand-driven components. I generate two new data series, the supply and demand-driven contributions to personal consumption expenditures (PCE) inflation, which quantify the degree to which either demand or supply is driving inflation in a current month. The series show expected time-series patterns. The demand-driven contribution tends to decline during recessions, while the supply-driven contribution tends to follow food and energy prices. Monetary policy tightening acts to reduce the demand-driven contribution of inflation. Oil-supply shocks act to increase the supply driven contribution, but decrease the demand-driven contribution of inflation. The decompositions can be used to test theory or by policymakers and practitioners to track inflation drivers in real time.
DOI: 10.24148/wp2022-18
Authors: Federal Reserve Bank of San Francisco, Adam Hale Shapiro
Institutions: Bank of Spain, Federal Reserve Bank of San Francisco
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4297338534