Trade Costs and Inflation Dynamics [US Paper]

A study was done on how trade cost shocks influence inflation. Using bilateral trade flows from detailed global input-output data and a gravity framework, it’s estimated about trade cost shocks and their effects on CPI inflation. Higher trade costs for final goods cause large but short-lived inflation spikes, while increased costs for intermediate inputs trigger more persistent inflation. A multi-country model of inflation with trade in final goods and intermediate inputs replicates these patterns. Trade cost shocks and tariffs on imported inputs transmit through global value chains and worsen monetary policy trade-offs. Models have been used to quantify the effects of trade costs during the 2018–2019 U.S.-China trade war and to estimate the contribution of trade costs during the post-pandemic inflation surge. Novel data on U.S. domestic sourcing shores allow to estimate trade cost shocks for the U.S. using Bayesian methods.

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