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Why Do Supply Disruptions Lead to Inflation? Survey Evidence from the COVID Pandemic

Author

Listed:
  • Thomas Kohler
  • Jean-Paul L’Huillier
  • Gregory Phelan
  • Maximilian Weiß

Abstract

Firms tend to justify price increases as necessary to cover rising costs. However, standard models imply that firms not only adjust prices to cost increases, but also to changes in spending. We present a model where, instead, there is differential adjustment depending on the type of shock. The model is disciplined using a firm survey, which shows that, towards the end of the pandemic, price increases were primarily a response to higher costs. In contrast, firms report not reacting to higher demand to avoid upsetting customers. Supply shocks are responsible for most of the upward adjustment of prices.

Suggested Citation

  • Thomas Kohler & Jean-Paul L’Huillier & Gregory Phelan & Maximilian Weiß, 2025. "Why Do Supply Disruptions Lead to Inflation? Survey Evidence from the COVID Pandemic," CESifo Working Paper Series 12212, CESifo.
    • Handle: RePEc:ces:ceswps:_12212
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    File URL: https://www.ifo.de/DocDL/cesifo1_wp12212.pdf
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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