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When Inflation Takes Hold: Labor-Market Pressure and Price Transmission

Author

Listed:
  • Elton Beqiraj
  • Mirabela Bika
  • Giovanni Di Bartolomeo

Abstract

This paper develops and estimates a state-dependent Phillips curve in which labor-market pressure and price adjustment jointly determine when an inflationary disturbance becomes aggregate inflation. Tight labor markets select a wage branch that raises marginal-cost pressure, while the level and age profile of price adjustment determine how rapidly that pressure reaches prices and how long its effects survive. This interaction generates an inflation impact-persistence frontier. The pricing state with the strongest immediate pass-through need not be the state with the longest-lived response. Estimated on U.S. quarterly data, the model locates postwar inflation surges in a high-pass-through pricing environment and finds inflation most vulnerable when that environment coincides with strong labor-market pressure. Bayesian evidence favors the joint state structure over specifications that suppress either its labor-pressure margin or its pricing-state margin.

Suggested Citation

  • Elton Beqiraj & Mirabela Bika & Giovanni Di Bartolomeo, 2026. "When Inflation Takes Hold: Labor-Market Pressure and Price Transmission," CIMEO Working Paper Series 208, Centre for Investigation and Modelling of Experimental Observations (CIMEO).
    • Handle: RePEc:ter:wpaper:00208
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    Keywords

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    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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