Delayed Inflation in Supply Chains: Theory and Evidence
115 Pages Posted: 6 Jun 2023 Last revised: 26 Dec 2023
Date Written: December 4, 2023
Abstract
How fully and quickly do supply chains transmit commodity price movements into inflation? In a production network with sticky prices, we show that the network delays full propagation of commodity price shocks to downstream firms. This delay from downstreamness occurs even when firms are forward-looking, and myopia amplifies it. We confirm the theory using shift-share designs exploiting firms' differential exposures to commodities through their networks. We find forward-looking responses to oil price movements but myopic responses for other commodities. Applying our model, we show that delayed network propagation of oil price movements forecasts the future path of core inflation.
Keywords: Inflation, Pass-through, Supply chains, Production network, Multi-sector, Oil, Commodities, Core inflation, Myopia
JEL Classification: E31, E37, D57
Suggested Citation: Suggested Citation