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What Drives Inflation? Lessons from Disaggregated Price Data

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  • Elisa Rubbo

Abstract

The COVID pandemic triggered high inflation alongside large relative price movements. I document that this comovement is not unique to the COVID episode, and follows a systematic pattern: the relative price of industries with flexible prices and inelastic factor supply rises with the aggregate output gap, and, controlling for the output gap, aggregate inflation rises with the relative price of those same industries. I show that both facts arise naturally in a multi-sector New Keynesian model where industries have heterogeneous price adjustment frequencies and factor supply elasticities. Through the model, I compute the share of consumer price inflation due to aggregate demand misalignment versus relative price adjustments, and construct price indices which forecast inflation at different horizons. Applying this framework to US data, relative price adjustments account for 49% of inflation fluctuations between 2000 and 2019, but only for 31% over the COVID period (2020-2023).

Suggested Citation

  • Elisa Rubbo, 2024. "What Drives Inflation? Lessons from Disaggregated Price Data," NBER Working Papers 32194, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32194
    Note: EFG ME
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    Cited by:

    1. Binetti, Alberto & Nuzzi, Francesco & Stantcheva, Stefanie, 2024. "People’s understanding of inflation," Journal of Monetary Economics, Elsevier, vol. 148(S).
    2. Crump, Richard K. & Eusepi, Stefano & Giannoni, Marc & Şahin, Ayşegül, 2024. "The unemployment–inflation trade-off revisited: The Phillips curve in COVID times," Journal of Monetary Economics, Elsevier, vol. 145(S).
    3. Hassan Afrouzi & Saroj Bhattarai & Edson Wu, 2024. "Relative-Price Changes as Aggregate Supply Shocks Revisited: Theory and Evidence," NBER Chapters, in: Inflation in the COVID Era and Beyond, National Bureau of Economic Research, Inc.
    4. Jenny Chan & Sebastian Diz & Derrick Kanngiesser, 2025. "Sticky production and monetary policy," Bank of England Staff Working Paper series 1155, Bank of England.
    5. Felipe Alves & Giovanni L. Violante, 2026. "Inflation vs Inclusion: Stabilization Policy in the Wake of the Pandemic," Staff Working Papers 26-13, Bank of Canada.
    6. Li, Mengheng & Mendieta-Muñoz, Ivan, 2026. "Unpacking trend inflation: Evidence from a factor correlated unobserved components model of sticky and flexible prices," European Economic Review, Elsevier, vol. 187(C).
    7. Nickel, Christiane & Kilponen, Juha & Moral-Benito, Enrique & Koester, Gerrit & Ciccarelli, Matteo & Enders, Almira & Holton, Sarah & Landau, Bettina & Venditti, Fabrizio & Bobeica, Elena & Brand, Cla, 2025. "A strategic view on the economic and inflation environment in the euro area," Occasional Paper Series 371, European Central Bank.
    8. Šestořád, Tomáš & Dvořáková, Natálie, 2026. "Origins of post-COVID-19 inflation in Central European countries," Economic Systems, Elsevier, vol. 50(1).

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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