Do supply chain pressures affect consumer prices in major economies? New evidence from time-varying causality analysis

Abstract

This study explores the dynamic causality between the consumer price index and supply chain pressure index in two large economies. Despite extensive research into the role of supply chains at the firm level, the literature on their impact on time-varying inflation and macroeconomic stability is scarce. Using data from the United States and the European Union from January 2000 to December 2021, we employ novel time-varying causality techniques to examine the evolving relationships among inflation, supply chains, real gross domestic product, interest rates, and oil prices. Our findings show that supply chains have a significant dynamic relationship with consumer prices, particularly during economic crises like the 2008 global financial crisis and the COVID-19 pandemic. Robustness tests including impulse response functions and the autoregressive distributed lag model confirm this causality. These results are critical for policymakers, emphasizing the importance of supply chains in controlling inflation and achieving global economic resilience and stability.