How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe

Abstract

We document how supply-chain pressures, household inflation expectations, and firm pricing power interacted to induce 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 supplyside impulses can generalize into broad-based inflation via an interaction of household expectations and firm pricing power.

Canadian food inflation: International dynamics and local agency

“…With Belarus and Russia being barred from European Union ports, their potash exports fell, a noteworthy event given their joint contribution of 40% to global potash trade (Glauber, 2023; Kee et al., 2023). While energy prices had already risen in 2021 due to economic recovery and reduced oil production by some OPEC nations, they further spiked following the conflict's onset (Acharya et al., 2023; Chen & Tombe, 2023).…”

“…The following list outlines potential research opportunities and data needs that could help us form a more comprehensive understanding of the Canadian grocery market landscape. Interactions between supply chain shocks, household inflation expectations, and grocers' pricing power in Canada —Recent work in the European context suggests that supply‐chain pressures heightened inflation expectations, which were amplified as dominant firms raised product markups in high‐demand sectors, and even as these pressures subsided, firms continued to elevate markups due to persistent inflation expectations (Acharya et al., 2023). Future research could explore the interaction between Canadian households' expectations and local grocers' pricing power in propelling food inflation originating from supply chain bottlenecks or shocks. Formation of inflationary expectations in Canada: Experience versus information channels —Similarly, recent empirical work suggests that households may adjust their inflation expectation in response to actual higher prices in their purchases (experience channel) and exposure to news regarding negative supply‐side shocks (information channel) (Acharya et al., 2023).…”

“… Interactions between supply chain shocks, household inflation expectations, and grocers' pricing power in Canada —Recent work in the European context suggests that supply‐chain pressures heightened inflation expectations, which were amplified as dominant firms raised product markups in high‐demand sectors, and even as these pressures subsided, firms continued to elevate markups due to persistent inflation expectations (Acharya et al., 2023). Future research could explore the interaction between Canadian households' expectations and local grocers' pricing power in propelling food inflation originating from supply chain bottlenecks or shocks. Formation of inflationary expectations in Canada: Experience versus information channels —Similarly, recent empirical work suggests that households may adjust their inflation expectation in response to actual higher prices in their purchases (experience channel) and exposure to news regarding negative supply‐side shocks (information channel) (Acharya et al., 2023). Given the widespread coverage that supply‐chain bottlenecks and delays can receive by mainstream media, it is important to discern the relative importance of each of these channels in the Canadian context. Transmission of international food prices to Canada —There is an important body of research estimating market price co‐integration and the degree of transmission of international food and energy prices to local food markets (Dillon & Barrett, 2016; Baquedano & Liefert, 2014; Goychuk & Meyers, 2014; Hernandez et al., 2013; Minot, 2011).…”

The Causal Effects of Global Supply Chain Disruptions on Macroeconomic Outcomes: Evidence and Theory

“…The common finding across these studies is that the scarcity of goods during disturbances to the supply chain brings the economy close to its capacity constraint, thus generating a non-linear and strong increase in inflation with a limited effect on output. Furthermore, our paper is related to studies showing that transportation costs are important for international trade and economic activity (Allen and Arkolakis, 2014;, infrastructure investment (Fuchs and Wong, 2022), asset prices , working capital (Antràs, 2023;Kim and Shin, 2023), inflation expectations (Acharya et al, 2023), the design of new taxes and pricing rules to offset distortionary effects on the transportation network , the interlinks between oil shocks and congestion in the supply chain Li et al, 2022), and the effects of supply chain disruptions during the COVID-19 pandemic (Brinca et al, 2021;Gordon and Clark, 2023).…”