Heterogeneous inflation volatility in production networks: Producer vs. consumer prices

We investigate the sources of heterogeneity in producer and consumer price inflation rates at both industry and aggregate levels. To this end, we develop a dynamic general equilibrium model with a production network, which enables us to disentangle the effects of producer price stickiness and consumer price stickiness in the transmission of sectoral shocks—a distinction often overlooked in theoretical models. We demonstrate that sectoral cost-push shocks and network connectivity are key determinants of the relative volatility between producer and consumer price inflation in the U.S. Furthermore, we quantify how these shocks propagate through cascading adjustments in producer prices, ultimately influencing the aggregate consumer price.