Pipeline Pressures and Sectoral Inflation Dynamics

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 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 role of sectoral shocks-joint with the production architecture-to understand the micro origins of disaggregate/headline inflation persistence/volatility.

Upstream, Downstream & Common Firm Shocks

“…31 Appendix Table C.2 shows that all of the top ten firms loading on the second factor are technology companies, and the bottom ten consists of nine energy firms and a petroleum shipping company. 32 A role for price pressures in the inter-firm network is supported by Smets et al (2019), who found evidence of inflation being passed through production networks. 33 Nine of the top ten firms by their loadings on the third factor in Appendix Table C.3 are energy related, and the bottom ten with negative loadings are all financial firms.…”

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

“…2 More closely related to our paper, Franzoni et al (2023) provides evidence that supplychain constraints lead to a decrease in competition, showing that these constraints can help explain about 19% of the U.S. inflation in industries with more asymmetric firm size distri-2 A related stream of literature delves into the transmission of shocks through the production network. Smets et al (2019) finds that price stickiness and sectoral shocks play a crucial role in understanding headline/disaggregated inflation. Auer et al (2019) emphasizes the importance of international input-output linkages in synchronizing PPI across countries.…”