The Missing Inflation Puzzle: The Role of the Wage-Price Pass-Through

Price inflation in the U.S. has been slow to pick up in the last two decades. We show that this missing inflation can be traced to a growing disconnect between unemployment and core goods inflation. We 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 pickup. We develop a theory where markups and pass-through depend on firms' market shares and show that increased import competition and rising market concentration reduce pass-through from wages to prices. We find strong empirical support for these predictions.