How Much Do Supply and Demand Drive Inflation?

Shapiro, Adam Hale

Journal Article

How Much Do Supply and Demand Drive Inflation?

Abstract: Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.

Keywords: supply; demand; inflation; PCE inflation;