Volume 20, Issue 2 April 2024

Here Comes the Change: The Role of Global and Domestic Factors in Post-Pandemic Inflation in Europe

Abstract

The world economy is currently grappling with an unprecedented inflation shock, comparable in magnitude to the 1970s, driven by a convergence of extraordinary factors. This surge raised global inflation to 8.1 percent in 2022, from 3.4 percent in 2020 and an average of 2.1 percent during 2010–20. The inflationary wave has posed a momentous challenge to developing nations and advanced economies historically accustomed to low and steady inflation rates. This paper disentangles the confluence of contributing factors to the post-pandemic rise in consumer price inflation, using monthly data and a battery of econometric methodologies covering a panel of 30 European countries over the period 2002–22. We find that while global factors continue to shape inflation dynamics throughout Europe, country-specific factors, including monetary and fiscal policy responses to the crisis, have also gained greater prominence in determining consumer price inflation during the pandemic period. Coupled with increasing persistence in inflation, these structural shifts call for a significant and extended period of monetary tightening and fiscal realignment.