The Fed has calculated how much of inflation is driven by demand and how much inflation is driven by supply, and their latest estimates find that supply is becoming less important and demand inflation remains high and sticky, see chart below.
Specifically, the Fed, for each of the 124 product categories in the core PCE index, estimated price and quantity equations using a VAR with 12 lags. They looked at the signs of residuals to identify how big a share of categories of consumer spending experienced a combination of higher prices and higher quantities (demand shock) or higher prices and lower quantities (supply shock).
With inflation being driven by demand, more demand destruction is needed in the form of higher rates from the Fed.
Source: FRBSF, Apollo Chief Economist
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