Abstract:

We propose a sufficient statistics approach for estimating aggregate productivity losses due to misallocation caused by suboptimal trend inflation. Our approach works for a wide class of sticky-price models and does not rely on calibration of a quantitative structural model. Using the micro price data underlying the U.K. CPI, we find sizable costs of inflation, in contrast to the previous literature. According to our estimates, increasing trend inflation to the Covid peak of 9% p.a. generates a 1% productivity loss due to misallocation.