The Sectoral Origins of Post-Pandemic Inflation

This paper quantifies the contribution of sector-specific supply and demand shocks to personal consumption expenditure (PCE) inflation. It derives identification restrictions that are consistent with a large class of dynamic stochastic general equilibrium models with production networks. It then imposes these restrictions in structural factor augmented vector autoregressive models with sectoral data on PCE inflation and consumption growth. The identification scheme allows the study to remain agnostic on theoretical modeling assumptions yet still gain structural empirical results: sectoral shocks cannot explain the initial inflation increases that followed the COVID-19 pandemic. This changed from the end of 2021 onward when shocks originating in non-services sectors became a major source of the post-pandemic inflation surge.