This paper was prepared as part of a Brookings Institution research project on supply-side issues affecting inflation. Find out more about this project here.
Abstract
We develop a framework to analyze the effects of supply chain shocks on inflation. One channel from supply chain shocks to inflation runs through production costs. We argue the effects of these cost shocks hinge on whether those shocks materialize immediately and are transitory, or whether they are persistent and anticipated. Supply chain constraints represent a second alternative channel through which disruptions that constrain domestic supply affect inflation. We first present these channels in a stylized aggregate demand and supply framework, and we then discuss findings from our own research and the extant literature about how each channel has affected U.S. inflation. We also discuss how recent tariff shocks may be interpreted through the lens of our frameworks. We then draw out implications for the conduct of fiscal and monetary policies when supply chains may be constrained.
Related Content
Authors
-
Acknowledgements and disclosures
The authors thank participants in a Brookings authors’ conference for early feedback on this paper.
Some of the material in this paper is based upon work supported by the National Science Foundation under Grant No. SES-2315629. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
