ICYMI: New Paper Presents Fresh Approach to Tackling Inflation

December 6, 2022

ICYMI: New Paper Presents Fresh Approach to Tackling Inflation

Last week, Isabella Weber and co-authors Jesus Lara Jauregui, Lucas Teixeira, and Luiza Nassif Pires released a new paper titled, “Inflation in Times of Overlapping Emergencies: Systemically Significant Prices from an Input-output Perspective.” The paper offers a bold new approach to fighting inflation.

“Understanding the role of systemically significant industries in driving up inflation is critical if we are to maintain price stability in a world with overlapping emergencies,” said Dr. Weber, assistant professor of economics at the University of Massachusetts-Amherst. “Rather than relying on suppressing demand to bring down prices, policymakers need a range of tools – from monitoring essential prices to windfall profits tax and emergency price caps – that would be effective in taming inflation.”

The authors reject the idea that the only way to get inflation under control is to tank the economy through painful interest rate hikes and fiscal austerity. Instead, they identify the critical role that a small number of “systemically significant” industries, such as the oil and gas sector, play in driving up broader inflation. The authors provide a valuable framework that justifies a broad range of targeted policies to more effectively fight the underlying sources of sectoral inflation, including price caps, minimum inventory requirements for systemically important goods, antitrust enforcement, and strict price gouging legislation.

“Debunking the idea that inflation is caused by ‘too much money, chasing too few goods’ is an important step toward advancing policy responses that actually bring down sky-high prices,” said Rakeen Mabud, chief economist at Groundwork Collaborative. “This new paper is a critical contribution to the literature on inflation, its causes, and how we can tackle it.”

The paper models the effects caused by price shocks to various industries during the COVID-19 pandemic and Russia’s invasion of Ukraine, demonstrating that a small number of sectors — including oil and gas, wholesale trade, and housing — had an outsized impact on inflation. The reason these industries matter so much is that they either are basic necessities or produce key inputs for other sectors in the economy, so price increases in these sectors become cost increases elsewhere, driving up prices economy-wide. The paper analyzes input-output relationships in U.S. data and simulates the effect of price shocks — based on historical fluctuations in prices as well as more recent data on price shocks from the pandemic and the war in Ukraine — to identify the sectors that pose systemic inflation risks.

Additional findings from the paper: