The two sides of inflation: How price increases and price cuts shape inflation

Inflation reflects the balance between firms raising and cutting prices, yet analyses focus only on aggregate rates, obscuring how pricing pressures transmit shocks. Existing decompositions use factor models or sign restrictions but lack transparent linkage to observed sectoral pricing decisions. Using 245 U.S. Personal Consumption Expenditures sub-indices spanning 1959–2024, we decompose inflation into upward and downward pricing pressures. We document fundamental asymmetry: inflationary pressure exhibits dramatic variation (2.35% to 12.68%) while deflationary pressure remains remarkably stable (0.72% to 5.18%). Informationally robust contractionary monetary policy operates through dual channels — restraining price increases and encouraging price cuts — with deflationary pressure peaking at 0.5 percentage points and remaining elevated for one year, resolving the price puzzle. Supply shocks operate primarily through price increases. These distinct mechanisms challenge symmetric views of inflation dynamics across shock types. The framework provides central banks real-time diagnostic tools for evaluating transmission and identifying inflation sources.