FED Study: Half of inflation was due to supply-chain issues

[OfTheCross]

How Much Did Supply Constraints Boost U.S. Inflation? - Liberty Street Economics

What factors are behind the recent inflation surge has been a huge topic of debate amongst academics and policymakers. We know that pandemic-related supply constraints such as labor shortages and supply chain bottlenecks have been key factors pushing inflation higher. These bottlenecks started...

libertystreeteconomics.newyorkfed.org

U.S. Results​

The first bar in the chart below presents our estimation of the U.S. CPI inflation rate over the 2019-21 period, which was calculated to be 9.18 percent from December 2019 to December 2021, annualized. The actual observed inflation during this period is 8.47 percent, so the model-calibrated rate is very close. The next three bars decompose the drivers of inflation. Notice that the sum of these bars is 10.5 percent, which is slightly higher given the nonlinear interactions between sixty-six sectors. The aggregate demand shock (“backed-out AD shock”) explains roughly 60 percent of model-based inflation. The remaining 40 percent of the model-based inflation is primarily explained by sectoral supply shocks (“sectoral supply shock”), while the change in households’ consumption patterns across sectors (“sectoral demand shock”) accounts for very little. The bottom line of this decomposition is that supply constraints magnified the impact of higher demand in inflation. Consequently, most sectors in the U.S.—fifty-eight out of sixty-six—were supply-constrained. This result is consistent with other research that shows that expansionary fiscal policy has increased the share of sectors classified as supply-constrained.


The model calibration shows the quantitative importance of both demand and supply shocks

Source: di Giovanni, Kalemli-Özcan, Silva, and Yildirim (2022).
Notes: The chart presents a U.S. closed-economy inflation decomposition for a sixty-six sector economy, 2019-21. The first bar shows model-based inflation considering all shocks (demand and supply). The second bar considers the aggregate demand shift only. The third bar uses sectoral demand shocks only. Finally, the fourth bar uses sectoral supply shocks only.

Conclusions​

The current debate on whether the Federal Reserve can engineer a soft landing needs to disentangle the drivers of U.S. inflation. Our work shows that inflation in the U.S. would have been 6 percent instead of 9 percent at the end of 2021 without supply bottlenecks. Our quantitative results clarify why some pundits were wrong to predict a transitory surge in inflation, while others were right in predicting high inflation, but for the wrong reasons. Put differently, fiscal stimulus and other aggregate demand factors would not have driven inflation this high without the pandemic-related supply constraints. In the absence of any new energy or other shock, it is therefore possible that the ongoing easing of supply bottlenecks will cause a substantial drop in inflation in the near term.

 

[BigMoneyGrip]

Half? how about all of it.. shyt was manufactured in order for companies to maximize profits

 

[Hood Critic]

 

[barese]

Climate change is a secret driver of inflation

Extreme weather is taking a toll on people, crops and infrastructure.

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