United States Federal Reserve Board research finds trade disruptions raise inflation with intermediate goods shocks more persistent

The United States Federal Reserve Board published a FEDS Note assessing how trade disruptions that increase trade costs affect inflation, concluding that higher trade costs tend to push up consumer price inflation and that disruptions to intermediate goods trade can create more persistent inflation by lowering firms’ production efficiency. Using a gravity-equation-based measure of bilateral trade costs for 41 countries over 1995–2020, the analysis finds that a 10 percentage point rise in trade costs for intermediate goods is associated with a 0.3 percentage point increase in CPI inflation within the first year, while an equally sized rise in trade costs for final goods lifts CPI inflation by 0.5 percentage point but with a more short-lived effect. A combined shock to intermediate and final goods trade costs implies a 0.8 percentage point increase in inflation that takes several years to fade. Embedding these estimates in a multiregional general equilibrium model, a U.S.–China trade tensions scenario in which U.S. trade costs on Chinese imports rise 20 percentage points and China partially retaliates with a 10 percentage point increase raises U.S. inflation by about 0.5 percentage point on a persistently elevated path, with the persistence driven by intermediate input disruptions and accompanied by slower U.S. GDP growth relative to baseline.