IS CURRENT INFLATION A DEMAND-PULL OR A COST-PUSH?

The correct identification of the type of inflation is very important from a policy perspective. This is because misidentification of the type of inflation leads to an incorrect policy action thereby hurting the economy as opposed to helping it. In this study, we applied both the ARDL model and the Threshold model. While the finding from the ARDL model fails to establish any long-run causal relationship among the model variables, INF, CPI, and PPI, the Threshold model, however, finds that, in both regimes of CPI and PPI, CPI has a negative and statistically significant impact, whereas PPI has a positive and statistically significant impact on the inflation rate. So, our conclusion is that the current US inflation is cost-push rather than demand-pull. Therefore, interest rate hikes by the Federal Reserve won’t ease current inflation rather worsen it.