Diffusion analysis of inflationary shocks in the Mexican economy. A study using dynamic network analysis

This paper analyzes the impacts of shocks on the price system of the economy. We investigate how variations in retail prices, in the exchange rate, and policy interventions affect the diffusion of inflationary pressures in Mexico, based on open data from the Consumer Price Index. We propose to analyze the processes of price formation and diffusion through network techniques. Empirical results allow us to identify the most relevant nodes in the price network of the Mexican economy. Results also show a dynamic network structure that evolves according to a core-peripheric structure, with important implications for the policies that are usually applied against inflation. The network analysis based on price correlations using the T-MDS methodology and a sensitivity analysis revealed that results are robust to adjustments in the threshold value. Finally, the examined dynamic network measures are related to the rate of inflation and rapid fluctuations in the official exchange rate. We found that staple foods are highly relevant to the network’s structure based on several centrality measurements.