Price inflation in the U.S. has been sluggish and slow to pick up in the last two decades. The paper presented in this Mannheim Applied Seminar shows that this missing inflation can be traced to a growing disconnect between unemployment and core goods inflation. The authors exploit rich industry-level data to show that weakening pass-through from wages to prices in the goods-producing sector is an important source of the slow inflation pick-up in the last two decades. They set up a theoretical framework where markups and pass-through are a function of firms' market shares and show that increased import competition and rising market concentration reduce pass-through from wages to prices. The authors then use industry-level data and find strong support for these two channels consistent with the implications of their model.
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