Pipeline Pressures and Sectoral Inflation Dynamics

NBB Working Paper Series 2019

85 Pages Posted: 27 Mar 2019

See all articles by Frank Smets

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Joris Tielens

KU Leuven; National Bank of Belgium

Jan Van Hove

KU Leuven - Center for Economic Studies

Date Written: February 28, 2019

Abstract

In a production network, shocks originating in individual sectors do not remain confined to individual sectors but permeate through the pricing chain. The notion of “pipeline pressures” alludes to this cascade effect. In this paper we provide a structural definition of pipeline pressures to inflation and use Bayesian techniques to infer their presence from quarterly U.S. data. We document two insights. (i) Due to price stickiness along the supply chain, we show that pipeline pressures take time to materialize which renders them an important source of inflation persistence. (ii) As we trace their origins to 35 disaggregate heterogeneous sectors, pipeline pressures are documented to be a key source of headline/disaggregated inflation volatility. Finally, we contrast our results to the dynamic factor literature which has traditionally interpreted the comovement of price indices arising from pipeline pressures as aggregate shocks. Our results highlight the (hitherto underappreciated) role of sectoral shocks – joint with the production architecture – to understand the micro origins of disaggregate/headline inflation persistence/volatility.

Keywords: Pipeline Pressures, Input-output linkages, Propagation, Spillovers

JEL Classification: E31, E32, D85, O51

Suggested Citation

Smets, Frank and Tielens, Joris and Van Hove, Jan, Pipeline Pressures and Sectoral Inflation Dynamics (February 28, 2019). NBB Working Paper Series 2019, Available at SSRN: https://ssrn.com/abstract=3346371 or http://dx.doi.org/10.2139/ssrn.3346371

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Joris Tielens (Contact Author)

KU Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

National Bank of Belgium ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

Jan Van Hove

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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