Pipeline Pressures and Sectoral Inflation Dynamics
NBB Working Paper Series 2019
85 Pages Posted: 27 Mar 2019
Date Written: February 28, 2019
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: Suggested Citation