Can supply chain disruptions explain the high inflation levels during Covid-19?

Sammanfattning: In countries such as the United States and the United Kingdom, the Covid-19 pandemic has caused the highest level of inflation since several decades. Explanations are sought after and disruptions of supply chains have been labeled the cause by many politicians. However, the empirical literature regarding the topic is limited. Hence, in order to extend the literature, this paper aims to investigate whether supply chain disruptions can explain the high levels of inflation. Moreover, the possibility of a heterogeneous effect across countries is also considered in order to gain a deeper knowledge of the relationship. A local projection methodology is used on time-series data spanning from 1999 to 2022 for the United States, the United Kingdom, the Euro Area and the Republic of Korea. The results indicate a small, positive and somewhat heterogeneous effect at either horizon 0 or 1 for the United Kingdom, the Euro Area and the Republic of Korea, while the estimates remain insignificant for the United States. This result is weakened when the robustness analyses are taken into account and the conclusion is, therefore, that the effect of supply chain disruptions on inflation is positive, but small in magnitude. The following implication is that supply chain disruptions only caused a small fraction of the increases in inflation experienced during the Covid-19 crisis.