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Pipeline Pressures and Sectoral Inflation Dynamics

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  • Frank Smets

    () (European Central Bank)

  • Joris Tielens

    () (National Bank of Belgium)

  • Jan Van Hove

    () (KU Leuven, KBC)

Abstract

In a production network, shocks originating in individual sectors do not remain confined to individual sectors but permeate through the pricing chain. The notion of “pipeline pressures” alludes to this cascade effect. In this paper we provide a structural definition of pipeline pressures to inflation and use Bayesian techniques to infer their presence from quarterly U.S. data. We document two insights. (i) Due to price stickiness along the supply chain, we show that pipeline pressures take time to materialize which renders them an important source of inflation persistence. (ii) As we trace their origins to 35 disaggregate sectors, pipeline pressures are documented to be a key source of headline/disaggregated inflation volatility. Finally, we contrast our results to the dynamic factor literature which has traditionally interpreted the comovement of price indices arising from pipeline pressures as aggregate shocks. Our results highlight the role of sectoral shocks – joint with the production architecture – to understand the micro origins of disaggregate/headline inflation persistence/volatility.

Suggested Citation

  • Frank Smets & Joris Tielens & Jan Van Hove, 2018. "Pipeline Pressures and Sectoral Inflation Dynamics," Working Paper Research 351, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201810-351
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    More about this item

    Keywords

    Pipeline pressures · Input–output linkages · Propagation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada

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