Pipeline Pressures and Sectoral Inflation Dynamics

Working Paper N° 351

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Abstract

In a production network, shocks originating in individual sectors do not remain
confined to individual sectors but permeate through the pricing chain. The notion
of “pipeline pressures” alludes to this cascade effect. In this paper we provide a
structural definition of pipeline pressures to inflation and use Bayesian techniques
to infer their presence from quarterly U.S. data. We document two insights. (i)
Due to price stickiness along the supply chain, we show that pipeline pressures take
time to materialize which renders them an important source of inflation persistence.
(ii) As we trace their origins to 35 disaggregate sectors, pipeline pressures are docu-
mented to be a key source of headline/disaggregated inflation volatility. Finally, we
contrast our results to the dynamic factor literature which has traditionally inter-
preted the comovement of price indices arising from pipeline pressures as aggregate
shocks. Our results highlight the role of sectoral shocks – joint with the production
architecture – to understand the micro origins of disaggregate/headline inflation
persistence/volatility.