Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. Using disaggregated price data, the author estimates that industry-specific shocks to goods whose supply cannot easily expand raise overall inflation through cost-push price wedges. Constructing a counterfactual inflation rate that would have prevailed had monetary policy kept output at potential allows consumer price inflation to be decomposed into components driven by the output gap and by these relative price shocks.

Elisa Rubbo National Bureau of Economic Research
Date Posted:

Elisa Rubbo finds that consumer price inflation in 2020 was due to industry-specific supply bottlenecks, while since 2021 excess aggregate demand has played an approximately equal role.

How much of inflation comes from sector shocks versus demand?

Core argument: The author argues that industry-specific shocks to inelastically supplied goods raise aggregate inflation through a cost-push shock that shows up as a price wedge.

Industry specific shocks to inelastically supplied goods increase aggregate inflation through a cost-push shock [showing up as] a price wedge. I construct the counterfactual consumer price inflation rate which would have prevailed had monetary policy closed the output gap at all periods. The difference between actual and counterfactual inflation is a measure of the component of inflation due to non-zero output gaps, accounting for their effect through inflation expectations and the price wedges χ. Figure 4 shows a decomposition of consumer price inflation between January 2019 and July 2022. The dark rust line is the official CPI [and the lighter orange line is the core PCE]. The bright orange line plots the component of the CPI due to the aggregate output gap. The dark blue bars instead represent the component of CPI inflation driven by exogenous shocks to the relative price wedges. All inflation series are normalized to zero in January 2020.

Takeaways by Macro Roundup® AI

  1. The author argues that industry-specific shocks to inelastically supplied goods raise aggregate inflation through a cost-push shock that shows up as a price wedge.
  2. The author constructs a counterfactual consumer price inflation rate that would have prevailed had monetary policy closed the output gap in all periods, treating the difference from actual inflation as the component attributable to non-zero output gaps, including effects through inflation expectations and price wedges.
  3. The decomposition of consumer price inflation from January 2019 to July 2022 separates the component driven by the aggregate output gap from the component driven by exogenous shocks to relative price wedges, with all inflation series normalized to zero in January 2020.

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