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Decomposing Supply‐ and Demand‐Driven Inflation

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  • ADAM HALE SHAPIRO

Abstract

The extent to which either supply or demand factors drive inflation has important implications for economic policy. I propose a framework to decompose inflation into supply‐ and demand‐driven components. I generate two new data series that quantify the degree to which either demand or supply is driving inflation in a current month. The demand‐driven contribution tends to decline during recessions, while the supply‐driven contribution tends to follow food and energy prices. Monetary policy tightening acts to reduce the demand‐driven contribution of inflation. Oil‐supply shocks act to increase the supply‐driven contribution, but decrease the demand‐driven contribution of inflation.

Suggested Citation

  • Adam Hale Shapiro, 2026. "Decomposing Supply‐ and Demand‐Driven Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 58(2), pages 365-388, March.
    • Handle: RePEc:wly:jmoncb:v:58:y:2026:i:2:p:365-388
    DOI: 10.1111/jmcb.13209
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    References listed on IDEAS

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    2. Maximiliano Dvorkin & Cassandra Marks, 2026. "Drivers of Wage and Employment Growth in Recent Years: A Supply and Demand Decomposition," Review, Federal Reserve Bank of St. Louis, vol. 108(4), pages 1-16, April.

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