Understanding Post-Pandemic Inflation Fluctuations: The Commodity Cost Channel

This paper employs a joint SVAR-IV model for the United States and the euro area to estimate the pass-through of energy and food commodity cost shocks to inflation. Exogenous commodity cost shocks—such as those triggered by the Russian invasion of Ukraine—had only a modest impact on inflation during the post-pandemic period. However, counterfactual analyses based on the pass-through estimates indicate that overall commodity cost fluctuations—including their endogenous responses to macroeconomic conditions—can almost fully account for the rise and subsequent decline of energy, food, and core CPI inflation over this period. These findings highlight that commodity costs constitute a key transmission channel through which macroeconomic developments affect inflation. Estimates of a standard Phillips Curve specification, including its slope, are shown to be severely biased when this channel is ignored.