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BISWorkingPapersNo1047Whatdrivesinflation?DisentanglingdemandandsupplyfactorsbySandraEickmeierandBorisHofmannMonetaryandEconomicDepartmentNovember2022JELclassification:E3,E5,E6,C3.Keywords:inflation,aggregatedemandandsupply,factormodel,signrestrictions,monetarypolicy.BISWorkingPapersarewrittenbymembersoftheMonetaryandEconomicDepartmentoftheBankforInternationalSettlements,andfromtimetotimebyothereconomists,andarepublishedbytheBank.Thepapersareonsubjectsoftopicalinterestandaretechnicalincharacter.TheviewsexpressedinthemarethoseoftheirauthorsandnotnecessarilytheviewsoftheBIS.ThispublicationisavailableontheBISwebsite().© BankforInternationalSettlements2022.Allrightsreserved.Briefexcerptsmaybereproducedortranslatedprovidedthesourceisstated.ISSN1020-0959(print)ISSN1682-7678(online)Whatdrivesinflation?Disentanglingdemandandsupplyfactors∗SandraEickmeier† BorisHofmann‡November3,2022AbstractWeestimateindicatorsofaggregatedemandandsupplyconditionsbasedonastructuralfactormodelusingalargenumberofinflationandrealactivitymeasuresfortheUnitedStates.Weidentifydemandandsupplyfactorsbyimposingtheoreticallymotivatedsignrestrictionsonfactorloadings.There-sultsprovideanarrativeoftheevolutionofthestanceofdemandandsupplyoverthepastfivedecades.Themostrecentfactorestimatesindicatethattheinflationsurgesincemid-2021hasbeendrivenbyacombinationofextraor-dinarilyexpansionarydemandconditionsandtightsupplyconditions.Weobtainsimilarresultsfortheeuroarea,butwithasomewhatgreaterrolefortightsupplyconsistentwiththegreaterexposureoftheeuroareatorecentadverseglobalenergypriceshocks.Wefurtherfindthattightermonetarypolicyandfinancialconditionsdampenbothdemandandsupplyconditions.JELclassification:E3,E5,E6,C3Keywords:inflation,aggregatedemandandsupply,factormodel,signrestric-tions,monetarypolicy∗WethankClaudioBorio,BenoˆıtMojon,AthanasiosOrphanides,YvesSch¨ulerandseminarparticipantsattheBISandtheDeutscheBundesbankforhelpfulcommentsandsuggestions.WealsothankJesusLasoPazosandBiancaPiccirilloforexcellentresearchassistance.TheviewsexpressedinthispaperarethoseoftheauthorsonlyanddonotnecessarilyreflectthoseoftheDeutscheBundesbank,theEurosystemortheBankforInternationalSettlements.†DeutscheBundesbank,CAMA,CEPR,sandra.eickmeier@bundesbank.de.‡BankforInternationalSettlements,boris.hofmann@(correspondingauthor).IntroductionOverthepastyear,inflationintheUnitedStatesandmanyothercountrieshassurgedtoitshighestlevelsincethe1970s(Figure1).Akeyquestionistowhichextentthesurgeisdrivenbydemandorsupply.Theformerwouldmakethecaseformonetaryandfiscalpolicytightening,whilethelatterwouldbeassociatedwithtrickypolicytrade-offs.Inthepublicdebate,thereissofarnoconsensusontherelativeimportanceofsupplyanddemandfactorsintheriseininflation.Whilemostcontributionsemphasisetheroleofadversesupplyfactorsintheformofsupplybottlenecksandhigherenergyprices(e.g.Budiantoetal.2021,somecommentatorspointtoexcessivedemandduetocatch-upeffectsandmassivemonetaryandfiscalstimulusinthewakeoftheCovid-19pandemic(e.g.Summers(2021),Furman(2022)).1Figure1:InflationintheUnitedStates151050-51975 1980 1985 1990 1995 2000 2005 2010 2015 2020Notes:Consumerpriceindex(CPI)inflation(black)andcoreCPIinflation(blue).Quarter-on-quarter,annualized,in%.SeeBIS(2022)foradetaileddiscussionofthevariousfactorsatworkintherecentinflationsurge.Thechallengeofdisentanglingdemandandsupplyfactorsbehindobservableinflationdynamicsis,ofcourse,notnew.Overthedecades,therelativeweightassignedtounderlyingdemandorsupplyfactorshasoftenplayedakeyroleinpolicydebatesanddecisions.Forinstance,theGreatInflationofthe1970swasattributedtomisguidedperceptionsofprimarilysupply-sideoriginsofinflationleadingtoanexcessivelyloosemonetarypolicystance(Nelson,2022).AnotherexampleisthedebateaboutthemissingdisinflationaftertheGreatFinancialCrisis(GFC)whichwasascribedtotighteningsupplyconditionsemanatingfromhigherenergyprices(CoibionandGorodnichenko2015)andnegativefinancialshocks(Gilchristetal.2017).AthirdexampleistheperiodofpersistentlowinflationduringtherecoveryfromtheGFC,whichwaslinkedtoinadequatedemand(Summers,2014)aswellastodisinflationarysupply-sidefactorsemanatingfromglobalisationandtechnologicaladvances(Borioetal.2018).Thispapertakesanovelapproachtodisentangleaggregatesupplyanddemand.Basedonastructuralfactormodelcomprisingmorethan140quarterlytimeseriesmeasuresofinflationandrealactivityintheUnitedStatesgoingbackto1970,weidentifyaggregatedemandandsupplyfactors.Thatway,weobtainindicatorsofaggregatedemandandsupplyconditionsandcanassesstheirroleinthedynamicsofinflationandrealactivity.Weestimatefactorsbasedonaprincipalcomponentanalysisandthenrotatethemtoidentifysupplyanddemandusingsignrestrictionsimposedonfactorload-ings.Specifically,weproposeasetoftheoreticallymotivatedsignrestrictionsonthefactorloadingsofinflationandeconomicactivityindicatorstoseparatesupplyanddemand.Theserestrictionsarebasedonthestandardsupplyanddemandframe-work,wherechangesinsupplymoveinflationandoutputinoppositedirections,whilechangesindemandmovebothvariablesinthesamedirection.Wethusiden-tifysupplyasafactorthatloadsnegativelyoninflationandpositivelyoneconomicactivity,anddemandasafactorthatloadspositivelyonbothinflationandeconomicactivity.Ouranalysishaspointsofcontactwithseveralstrandsofliterature.Orstruc-turalfactoranalysisismethodologicallyrelatedtofactormodelsusingzeroorsignrestrictionsonfactorloadingstoanalysetheimpactofmonetarypolicyontheyieldcurve(G¨urkaynaketal.2005,Swanson(2021)andAndradeandFerroni(2021)),internationalbusinesscycles(Koseetal.2003)andglobalfinancialconditions(Eick-meieretal.(2014)).Weaddtothisliteraturebyproposingastructuralfactormodelthatdisentanglesaggregatedemandandsupplybasedonsignrestrictionimposed2onfactorloadings.Thesignrestrictionweusetoidentifydemandandsupplyfactorsaresimilartothoseusedintheliteratureonstructuralvectorautoregressionstoidentifyaggregatedemandandsupplyshocks(CanovaanddeNicol´2003,Peersman2005).Shapiro(2022a)hasrecentlyusedsimilarrestrictionstosplitthePCEbasketintodemand-andsupply-drivengroupsbasedonthesignofunexpectedchangesinpricesandquantities.Inouranalysis,wegobeyondshocksandextractindicatorsofdemandandsupplyconditionsfromthedata.Byprovidingindicatorsofthestanceofaggregatedemandandsupply,ouranal-ysisalsocontributestotheliteratureonbusinesscycleindicators.Thisliterature,whichwaspioneeredbyStockandWatson(1998),StockandWatson(2002b)andStockandWatson(2010),usesfactormodelsestimatedonlargemacroeconomicdatasetstoderiveindicatorsofthestateofthebusinesscycle.ProminentexamplesofsuchbusinesscycleindicatorsaretheConferenceBoardandtheEurocoinindi-cators.Ouranalysisdisentanglesbusinesscycleconditionsfurtherintounderlyingdemandandsupplyconditions.Moreover,basedonouranalyticalframework,wecanalsoperformhistoricaldecompositions,backingoutthecontributionofsupplyanddemandfactorstotheevolutionofinflationandeconomicactivitymeasuresovertime.Thisallowsustoassess,forinstance,towhichextentCPIinflationinagivenpointintimewasdrivenbydemandorsupplyconditions.OurstructuralfactorsofferanarrativeoftheevolutionofdemandandsupplyconditionsandoftheirroleininflationdynamicsintheUnitedStatesoverthepastfivedecades.Inparticular,fortherecentperiodsince2021,ouranalysisindicatesacombinationofverystrongdemandconditionsatlevelsnotseensincethe1970sandtightsupply.Historicaldecompositionssuggestthatrecentinflationdynamicshavebeendriveninparticularbystrongdemand,andtoalesserextentalsobytightsupply.Alsoforotherimportanthistoricalepisodesthereareanumberoffindingsworthhighlighting.WefindthatacombinationofoccasionallytightsupplyandpersistentlyexpansionarydemandconditionswasdrivingtheGreatInflation.ThemissingdisinflationaftertheGFCwasattributabletotightsupplycounteractingthedisinflationaryeffectsofweakdemandaccordingtoourestimates.AndfortheperiodbetweentheGFCandthepandemic,ouranalysissuggeststhatbothsupplyandweakdemandwereresponsibleforpersistentlylowinflation.Thesefindingsholdupinanumberofrobustnesschecksandarealsorobustinapseudoreal-timeanalysisestimatingthefactorsrecursively.Asanadditionalexercise,weusetheestimatedfactorstoassessthedemandand3supplyeffectsofmonetarypolicyshocksandoffinancialshocks(specificallyshockstotheexcessbondpremiumofGilchristandZakrajˇsek(2012),thusexploringtherelevanceandstrengthofdemandandsupplychannelsinthemonetaryandfinancialtransmissionprocess.Mostempiricalpapersanalysetheeffectsofmonetarypolicyandfinancialshocksonoutputandinflationwhichonlyprovidesinformationonwhethersupplyordemandeffectsdominate.Weassesswhetherand,ifyes,howtheshocksaffectbothsupplyanddemand.Thisanalysisrelatestotheliteratureonthesupplyeffectsofmonetarypolicyandfinancialshocksthroughacostchannel(BarthandRamey2001,Christianoetal.2005,Gilchristetal.2017)orthroughcapitalre-allocationacrossfirms(Baqaeeetal.2021).Finally,whilethemainpartoftheanalysisisfocusedontheUnitedStates,wealsoassesstheevolutionovertimeofsupplyanddemandconditionsintheeuroarea.Thispartoftheanalysisisbasedonquarterlydataforthefourmajoreuro-areaeconomies(France,Germany,Italy,Spain)goingbackto1999.Theresultssuggestthat,intheoverlappingperiodofanalysis,thedynamicsofdemandandsupplyintheeuroareahavebeensimilartothoseintheUnitedStates.Specifically,inthepost-pandemicinflationsurge,alsobothstrongdemandandweaksupplyfactorsappeartohavebeenatwork.However,tightsupplyconditionshavebeenrelativelymoreimportantcomparedtotheUnitedStates,inparticularinthefirsttwoquartersof2022.Thisfindingisconsistentwiththenotionthatsupplyfactorsplayarelativelymoreimportantroleintheeuro-areainflationsurgeduetogreaterconstraintsinenergysupplyrelatedtotheRussia-Ukrainewar.Theremainderofthepaperisstructuredasfollows.Insection2wepresentthedata.Insection3welayoutthemethodologytoidentifyandestimatethestructuraldemandandsupplyfactors.Section4reportsthemainresultsoftheanalysistogetherwithrobustnesschecksandareal-timeanalysis.Insection5weexaminethedynamiceffectsofmonetarypolicyandfinancialshocksondemandandsupply.Theanalysisandtheresultsfortheeuroareaarereportedinsection6.Section7concludes.DataThedatausedintheanalysiscomprisemeasuresofinflationandofrealeconomicactivityintheUnitedStatesovertheperiod1970Q1until2022Q2.TheindividualdataseriesincludedinthedatabasearelistedintheappendixinTableA.1.There,wealsoprovideinformationaboutthesourcesofthedata,howtheyaretransformed4priortotheanalysisandonthesignrestrictionsappliedtothefactorloadingintheanalysis.Inthegroupofinflationmeasures,thedatasetincludesmeasuresofaggregateandsectoralinflation,changesinlaborcosts,aswellasindicatorsofinflationex-pectations.Inthegroupofmeasuresofrealeconomicactivity,thedatasetcoversmeasuresofrealoutputgrowth,inparticularrealGDPanditscomponents,aswellasindustrialproductiongrowthattheaggregateandsectorallevel,measuresofaggregateandsectoralemploymentgrowth,unemploymentratesandcapacityutil-isationrates.Overall,thedatasetcomprisesaroughlyequalnumberofinflationandeconomicactivitydataseries.Itisunbalancedassomeseriesarenotavailableovertheentiresampleperiod.Inordertoobtainabalanceddataset,weusetheexpectationmaximisation(EM)algorithmtointerpolatethosedataserieswhereobservationsweremissing(seeStockandWatson2002afordetails).Sincethefactormodelrequiresstationarydata,thevariablesaretransformedaccordingly.Inflationratesarequarter-on-quarterlogchangesofpriceindices.RealGDP,industrialproductionandemploymentetc.alsoenterasquarter-on-quarterlogchangesoftheunderlyinglevelseries,whileunemploymentratesandcapacityutilisationratesenterinlevels.WeremoveoutliersfollowingtheprocedureproposedbyStockandWatson(2005).2Finally,wenormaliseeachseriestohaveazeromeanandaunitvariance.WecollectthedatafortheanalysesbelowintheN-dimensionalvectorofvariablesXt=(x1,t,...,xN,t)′fort=1,...,T.MethodologyTheestimationofthedemandandsupplyfactorsproceedsinseveralstepsassum-marisedinTable1.Thefirststepistheestimationthefactormodel.Thesubsequentstepsidentifythestructuralfactorsthroughsignrestrictions.3.1 FactormodelWeapplyafactormodeltoXtbasedonStockandWatson(2002b)andBaiandNg(2002).EachelementofXtisassumedtobethesumofalinearcombinationofrcommonfactorsFt=(f1,t,...,fr,t)′andanidiosyncraticorvariable-specificOutliersareheredefinedasobservationsofthestationarydatawithabsolutemediandeviationslargerthan6timestheinterquartilerange.Theyarereplacedbythemedianvalueoftheprecedingfiveobservations.5Table1:SummaryoftheestimationapproachStep1:EstimationofthefactorsFtasthefirstrprincipalcomponentsofXt,thevectorofmacroeconomicvariables(whichhavezeromeanandunitvariance).Thisyieldsther×1-dimensionalvectorFbt.Thosefactorsareonlyidentifieduptoarotation:Foranyorthonormalr×r-dimensionalmatrixQ(Q′Q=Ir)wecan′ ′writeλ′iFt=λ′iQ′QFt=λeiFtwithλei=λ′iQ′andFt=QFt.Whilethismeansthattherawprincipalcomponentfactorsarenotinterpretable,italsomeansthatfactorscanbeidentifiedbyfindingmatricesQthatyieldeconomicallymeaningfulfactorloadings.bStep2:FtarerotatedalongthelinesofRubio-Ram´ırezetal.(2010).I.e.QisobtainedfromaQRdecompositionofar×rrandommatrix,whereeachelementhasanindependentstandardnormaldistribution.ThisyieldsFbt=QFbt.SeeRubio-Ram´ırezetal.(2010)fordetails.Step3:Regressionofeachvariableontherotatedfactorestimates,i.e.OLSestimationofxit=λiFbt+vitfori=1,...,N.Thisyields,amongothers,estimatesofλi,λbi.Step4:VerifyifthesignrestrictionslistedinTable3aresatisfiedforλbionaverageoverallcountriesandthecorrespondingvariables.Ifyes,keepFbt(andQ),otherwiserejectthedraw.Step5:Repeatsteps2-4until200validdraws(i.e.200vectorsofFbtforwhichthesignrestrictionsaresatisfied)areobtained.Step6:Whilethe200FbtsareshownasblacklinesinFigure1,theredlinereferstothe”MedianTarget”factors.FollowingFryandPagan(2007),wepicktheonerotationmatrixwhichyieldsdemandandsupplyfactorsthataremostcloselyrelatedtothemedianfactors.Fordetails,seeFryandPagan(2007).6componenteit:xi,t=λi′Ft+ei,t,i=1,...N(3.1)whereλiisther×1vectorofcommonfactorsloadings,andλ′iFtisthecommoncomponentofvariablei.Thefactorsaremutuallyorthogonalanduncorrelatedwiththeidiosyncraticerrors.ThelattercanbeweaklymutuallyandseriallycorrelatedinthesenseofChamberlainandRothschild(1983).Thecommonality(i.e.thevariancesharesexplainedbythecommonfactors)ofagivensetofvariablesisgivenbyvar(λ′iFt)/var(xi,t).Thecommonfactorsareesti-matedasthefirstrprincipalcomponentsofX=(X1,...,XT)′,Fb=(Fb1,...,FbT)′=√Tv,wherevisthematrixofeigenvectorscorrespondingtothefirstreigenvaluesofXX′,andtheloadingsareestimatedasΛb=(λb1,...,λbN)′=X′Fb/T.Table2providesthevariancesharesandthecumulativevariancesharesexplainedbythefirst10principalcomponents.Theresultssuggestthatthreefactorsexplainmorethan50%ofthevarianceofthedatasetonaverageoverallvariables,whichisareasonableshareforaheterogeneousmacroeconomicdataset.Basedonthisinformalcriterion,weproceedinthesubsequentanalysiswiththreefactors,iden-tifyingtwoasdemandandsupplyrespectively.Thethirdfactorisrestrictednottosatisfytherestrictionsimposedontheothertwofactors.Itismeanttocaptureeverythingelsethatissystematicallydrivingthedatabesidesthestructuralfactors.Table2:CumulativevariancesharesNumberoffactorsCumulativevarianceshare1252433524585626657678699711073Notes:Cumulativevariancesharesexplainedbythefirst10principalcomponents(in%).7Asiswellknown,thecommonfactorsandfactorloadingsarenotidentifiedseparately(see,e.g.,BaiandNg2006)becauseXt=ΓFt+vt=ΓQ′QFt+vt(3.2)whereΓisthematrixoffactorloadingsandQdenotesanorthonormalrotationmatrixsuchthatQ′Q=Ir.Conceptuallymotivatedrestrictionsareneededtoidentifystructurallyinterpretablefactors.3.2 IdentificationapproachThefactorsareidentifiedbypickinglinearcombinationsoftheelementsofFbtwhichyieldsignsonthefactorloadingsthatareconsistentwithpriortheoreticalconsid-erations(steps4to8inTable1).Specifically,equation(3.2)canbewrittenasfollows:XtL=ΓeQFt+vt(3.3)whereΓe=ΓQ′.ThesignrestrictionsareappliedtotheelementsofthematrixΓe.ThecorrespondingidentifiedfactorisobtainedasFet=QFt.Toidentifysupplyanddemand,weproposeasetoftheoreticallymotivatedsignrestrictionsonthefactorloadingsofinflationandeconomicactivityindicators.Thesignrestrictionsarebasedonastandardsupplyanddemandframework,wherechangesinsupplymoveinflationandoutputinoppositedirections,whilechangesindemandmovebothvariablesinthesamedirection.Supplyexpansionswouldboostoutputanddampeninflation,whiledemandexpansionswouldboostbothinflationandoutput.Thistranslates–broadly–intothefollowingsignrestrictionsonthefactorload-ings:inflationmeasuresloadnegativelywhilerealeconomicactivitymeasuresloadpositivelyonthesupplyfactor;bothinflationandrealeconomicactivitymeasuresloadpositivelyonthedemandfactor.Table3summarisesourbroadidentifyingre-strictionsemployedtodisentangledemandandsupplyfactors.AppendixTableA.1providesmoredetailedinformationonwhichrestrictionsweimposeonindividualvariables.Specifically,werequiretherestrictionstoholdforthearithmeticmeansoftheloadings,forkeyvariableswhichwedefineexanteandforalargeshareofvari-ables.3Weleavesomevariables(unitlaborcostvariables,governmentconsumption392.5%isthelargestsharepossible.Whenwetrytorestrictloadingsofmorevariables,no8andinvestmentandgovernmentconsumptionandinvestmentdeflators,variablescapturinglaborforceparticipation)unrestricted.Andweonlyrestricttheloadingsofthedemand,notofthesupplyfactoroncapacityutilizationandemploymentmeasures(includingunemploymentandhoursworked)asthedevelopmentofthosevariablestoachangeinaggregatesupplyisambiguousapriori.Table3:IdentifyingsignrestrictionsonfactorloadingsDemandfactorSupplyfactorMeasuresofpriceinflation+–Measuresofrealeconomicactivity++Notes:Thetablesummarisestheidentifyingrestrictionsinabroadsense.AppendixTableA.1providesmoredetailedinformationonwhichrestrictionsweimposeonindividualvariables.Weimplementthisidentificationschemeasexplainedinsteps2-4inTable1.Theprocedureyields200structuraldemandandsupplyfactorestimatesforwhichthesignrestrictionsaresatisfied.Wereportinthefollowingthefullrangeofthese200factorsaswellasthe”MedianTarget”factorsalongthelinesofFryandPagan(2007)(step6inTable1).Thefactorsareorthogonalbyconstruction.Orthogonalityofthefactorsisanidentifyingassumptionasitisforstructuralshocks.Thisassumptionis,however,notexceedinglyrestrictivesincenothingpreventsthefactorstoaffecteachotherwithalag.Inordertofacilitatethequantitativeinterpretationofthefactors,wenormalisethemonrealGDPgrowth,bymultiplyingthefactorswiththerespectivestandarddeviationandthefactorloading.Theunitsofthefactorsareinpercentagepointsasthereflectthedeviationofvariablesmeasuredinpercentfromtheirnormalleveldefinedbythesamplemean.Thestructuralfactorsthusidentifiedarebroadlydefined.Theyincorporateanypossibleshifterofdemandandsupply,suchaschangesinpreferences,monetarypolicy,fiscalpolicy,energypricechanges,laboursupplychangesetc.However,thisbroad-basednatureoftheidentifiedfactorsisexactlywhatweareaimingat,sincethegoalofouranalysisistoidentifyfactorsthatrepresentthestructuraldriversofdemandandsupplyconditionsinthebroadestsenseratherthantheeffectsofsomenarrowlydefinedspecificstructuraldrivers,suchase.g.amark-upshock.Thefactorscanbeinterpretedasmeasuresofaggregatedemandandsupplyvalidmodel(i.e.modelwheresignrestrictionsaresatisfied)isfound.9conditions.Alevelofthedemandfactorabovezerowouldindicateexpansionarydemandconditions,withalargenumberofinflationandrealactivitymeasuresabovetheirnormallevelsdefinedbytheirsampleaverages.Alevelofthesupplyfactorabovezerowouldindicateexpansionarysupplyconditions,reflectingalargenumberofinflationmeasuresbelowtheirnormallevelandalargenumberofrealactivitymeasuresabovenormallevels.Whenbothinflationandrealactivityrise,thiswouldbereflectedintheanincreaseinthelevelofthedemandfactor.Ifinflationfallsandoutputrises,thesupplyfactorwouldmoveup.Empiricalresults4.1 AggregatedemandandsupplyfactorsFigure2showstheevolutionoftheestimatedstructuraldemandandsupplyfactorsoverthesampleperiod1970Q1–2022Q2.Weshowthefactorsassociatedwithallmodelssatisfyingthesignrestrictionsinblackandthe”MedianTarget”factorsinred.Asdiscussedbefore,ahigherlevelofthefactorsreflectmoreexpansionarydemandandsupplyconditions,respectively.TheshadedareasindicaterecessiondatesasidentifiedbytheNationalBureauofEconomicResearch(NBER).Giventhelargecrosssectionwedonotneedtoaccountforestimationuncertainty(seealsoBernankeetal.2005).Therangeoffactorestimatesthereforeonlyreflectstheamountofidentification(ormodel)uncertainty.Thefactorrangeisformostperiodsfairlytight.Hence,identificationuncertaintydoes,ingeneral,notseemtobeamajorissue.Theestimatedfactorsofferanarrativeoftheevolutionofdemandandsupplyconditionsoverthepastfivedecades.TheresultssuggestthattheGreatInflationofthe1970swascharacterisedbypersistentlystrongdemandandepisodicallytightsupplyconditionsrelatedtotheoilpriceshocks.ThechartsalsoshowhowexcessdemandwaseliminatedinthewakeoftheVolckerdisinflationintheearly1980s.Supplyconditionseasedonlylater,afterthe1981–82recessionwhenoilpricesre-cededsharply.10Figure2:DemandandsupplyconditionsintheUnitedStatesDemand10-1-21980 1990 2000 2010 2020Supply10-1-2-31980 1990 2000 2010 2020Notes:Inpercentagepoints.NormalisedtohavethesamestandarddeviationasGDPgrowthandmultipliedwithitsloadings.Red:MedianTargetestimates,black:estimatesfromallmodels.Greybars:NBERrecessions.Theperiodfromthemid-1980suntiltheturnofthemillenniumwasthencharac-terisedbyacombinationofmostlyneutraldemandconditionsandgenerallystrongsupply.Thiswasinterruptedbytheearly1990srecession,whendemandcontractedandatthesametimesupplytightenedinthewakeoftheoilpriceshocktriggered11bytheIraqwar.Subsequently,supplyconditionsloosenedsignificantly,reflectingtheso-calledNewEconomyboom.Supplyconditionsstrengthenedconsiderablythroughoutthe1990s,peakingin1998andthenrecedingsharplyjustbeforetheburstingofthedot-combubbleinearly2000.Thesubsequentrecessionwasassoci-atedwithamarkedtighteningofdemandconditions.Thefirstdecadeofthe2000swascharacterisedagainbystrengtheningsupplyandonaveragebalanceddemand.TheGreatRecessioninthewakeoftheGFCof2007–2009wasassociatedwithastrongcontractioninbothdemandandsupply.Thepost-crisisyearswerethencharacterisedbysubdueddemandandsupplycondi-tions,withdemandinitiallyreboundingfasterthansupply.Thiswouldexplainwhytherecessionwasnotfollowedbyastrongerandmorepersistentdeclineininflation,i.e.themissingdisinflation.From2013uptotheoutbreakoftheCovidpandemicin2020,supplyconditionsstrengthened,whiledemandconditionsweremostlysub-dued.Thissuggeststhatacombinationofstrongsupplyandweakdemandseemstohavebeendrivingpersistentlowinflationovertheseyears.TheCovid-19recessionin2020wasassociatedwithasteepfallindemandbutalsowithtightersupplyconditions.In2021,demandconditionsstartedtoreboundsharplyinthewakeofcatch-updemandeffectsaswellasextraordinarymonetaryandfiscalpolicyeasing.Supplyconditionsinsteadfurthertightenedassupplybot-tleneckpersistedandenergypricessurgedinthewakeoftheRussia-Ukrainewar.In2022Q2,thelastobservationofoursampleperiod,estimateddemandconditionsreachedthehighestlevelonrecord,evenhigherthanthelevelsseeninthe1970s,whilesupplyconditionsstayedrestrictive.Inordertoassesstheroleofdemandandsupplycondi