Heterogeneous Inflation Volatility in Production Networks: Producer vs. Consumer Prices

Abstract

We investigate the sources of heterogeneity in producer and consumer price inflation rates at both industry and aggregate levels. To this end, we develop a dynamic general equilibrium model with a production network, allowing us to disentangle the effects of producer price stickiness and consumer price stickiness in the transmission of sectoral shocks, a distinction often overlooked in theoretical models. We demonstrate that sectoral cost-push shocks and network connectivity play crucial roles in explaining the relative volatility between producer and consumer price inflation in the U.S. Additionally, we quantify how these sectoral cost-push shocks propagate through cascading changes in producer prices, ultimately influencing the aggregate consumer price.

Keywords: Cost-push shock, inflation volatility, pass-through, production networks

JEL Classification: E31, E32