Description

The absence of a clear positive output-inflation tradeoff in recent data suggests that, in addition to demand factors, supply shocks have also been at play in recent downturns. With that in mind, I account for the “supply-side origins” of annual U.S. PCE inflation. I measure how employee compensation, the cost of capital goods, and imports and imported intermediates, as well as measured productivity growth in different industries contribute to inflation in the price of the final goods and services that make up Personal Consumption Expenditures (PCE) in the United States. What has driven inflation dynamics is not the change in the U.S. supply chain of consumer goods and services or changes in factor shares. Instead, it has been the movements in import prices, more specifically oil prices, that have driven inflation over the past two decades. They alone account for 45 percent of the variance of annual PCE inflation in the U.S. from 1999-2015.