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Inflation is determined by interaction between monetary policy and real factors, including shocks to supply and demand for different components of the consumption basket. We use a 15-sector New Keynesian model to quantify the contributions to inflation from sectoral supply and demand shocks, monetary policy shocks, and aggregate real shocks. The model is estimated by maximum likelihood on U.S. data from 1995 through 2019, when the policy regime appeared to be stable. Decomposing the 2012-2019 inflation shortfall, and its surge starting in 2021, we find that sectoral shocks were major contributors to the inflation deviations from target.
