Inflation diffusion through supply chains

Abstract

This study explores the relationship between supply chains and the propagation of producer price shocks. It contributes to the existing literature by identifying an inflation diffusion network that tracks how inflation shocks spread through input–output linkages in South Korea, with identification relying on variance decompositions of producer prices. The results reveal that industries transmitting inflation shocks are mainly located upstream within the input–output tables, while those receiving inflation shocks correspond to downstream sectors. When industrial policies target upstream industries in South Korea, the diffusion of price shocks is notably higher. To measure the extent of this propagation, this study employs regression analysis on each link in the inflation network and matching it with the corresponding link in the production network. The findings indicate that 15.4% of inflation is correlated with the underlying supply chains. This paper also demonstrates the robustness of the analysis by expanding the VAR decomposition to VARX, which accommodates variations in exchange rates and commodity prices.