In a recent San Francisco Fed economic letter, Sylvain Leduc, Huiyu Li and Zheng Liu answered the question: “Are margins the cause of inflation’s ups and downs?“If we define inflation as a generalized increase in prices across the economy, the answer is largely ‘no’.”
Excerpt from the conclusion of the letter:
Using sector data, we show that margins have increased substantially in a few important sectors, such as automobiles and petroleum products. However, overall margins – the most relevant measure of headline inflation – have remained essentially flat since the start of the recovery. Therefore, rising margins have not been the main driver of the recent surge and subsequent decline in inflation during the current recovery.
Two charts are essential to see the difference between sector/industry specific prices and general prices:
Note that a decomposition used in this job refers to the non-agricultural sector Business sector, and normalizes almost a year earlier than in Leduc-Li-Liu.
