Cumulation of Individual Responses to Input Price Changes: Estimates from an Input–Output System with Distributed Activities

Abstract

This paper uses an inter-industry transactions model, similar to the input–output model with distributed activities of ten Raa, to examine short-term inflation dynamics. Aggregate output prices appear to respond more slowly to changes in the prices of aggregate inputs than prices in individual industries appear to respond to changes in the prices of individual inputs. This difference is caused by a ‘cumulation effect’ if firms in individual industries adjust prices relatively quickly, but the small individual lags cumulate as commodities pass through the chain of production. This paper shows that the transmission mechanism—dynamic interactions created by industries’ use of each other's commodities—can generate a significant cumulation effect in the US economy. The paper uses detailed input–output data to show that more cumulation becomes apparent when inter-industy flows are modelled more completely than has been the case in previous studies.