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This edition was written by Sarah Ahmad, Tristan Loa, Jack Spira, and David Wessel.
Analyzing U.S. import and consumer data from 2019 to 2023, Salomé Baslandze and Simon Fuchs of the Federal Reserve Bank of Atlanta find that shipping delays, which limit product availability, translate into immediate price increases, while increases in import and freight costs are transmitted to consumers only with a short lag. They also find that firms, including non-importers, raise prices when competitors face disruptions. Pass-through effects are larger in sectors with historically higher inflation and during periods of elevated overall inflation. The findings suggest that supply chain disruptions contributed to pandemic-era inflation not only through direct cost increases but also through pricing spillovers across firms, amplifying inflationary pressures.
Pairing data on extreme weather events in 151 countries with macroeconomic data from 2000 to 2024, Torsten Ehlers of the Bank for International Settlements and co-authors find that average-sized droughts, landslides, and wildfires reduce GDP two years later by 2%, 1%, and 0.4%, respectively. These longer-run losses are much larger than the average cost (0.14% of GDP) of direct damages across all categories of natural disasters. While the effects of disasters on core and headline inflation are typically small and short-lived, food prices rise an additional 0.5% one year after an average disaster and 1% after extreme storms. A country's ability to provide fiscal relief (proxied by its sovereign credit rating) and its level of insurance coverage (proxied by insurance premium volume and insurance company assets) mitigate the macroeconomic effects of some disasters.
Past research on fiscal multipliers assumes that federal defense funding flows to the location of prime defense contracts, but prime contractors often outsource work to subcontractors located somewhere else. Using data on defense subcontract awards since 2011, Xiaoqing Zhou of the Federal Reserve Bank of Dallas and Geumbi Park and Sarah Zubairy of Texas A&M find that more than 70% of subcontract dollars cross state lines. Taking into account the relocation of where funds actually flow, the authors estimate that local fiscal multipliers are 10% to 20% percent higher than conventional estimates based on prime contract location, reducing the implied cost per job from $400,000 to $300,000. Subcontractors exhibit smaller and less persistent gains in employment and sales compared to prime contractors, highlighting the shorter and less stable nature of subcontracting.
"For a long time, prices and wages barely rose in Japan despite improvements in economic conditions. However, the impact of global inflation following the pandemic spread throughout the country in the form of higher import prices, causing Japan's economy to be struck with the kind of high inflation it had not experienced for a prolonged period. As a result, wages—which tended to decline and not rise after the collapse of the bubble economy in the early 1990s—have recorded their highest growth since the bubble period. This is partly because, while labor market conditions had begun to tighten due to labor shortages before the pandemic, they have now grown tighter across a wider range of industries following the pandemic. These developments indicate that Japan's economy is transitioning from a very unique economy with a "zero norm"—which assumes that both prices and wages are unchanged—back to a normal, growing economy—where both prices and wages continue to rise in interaction with each other," says Bank of Japan board member Asahi Noguchi.
"Especially since April 2025, the global economy has faced large downside risks arising from U.S. tariff policy. It is not yet clear at what point and to what extent these risks will be resolved. On the other hand, various economic indicators for Japan show steady progress in achieving the 2% price stability target. This suggests that the need to adjust the policy interest rate is increasing more than ever. Put differently, in terms of making policy decisions, upside risks to prices and economic activity in Japan are currently outweighing the downside risks. In this sense, it can be said that monetary policy in Japan is now entering a phase in which a careful assessment of the situation is necessary."
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