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The 2020-2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection
Author:
Chikako Baba
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Mr. Romain A Duval
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https://orcid.org/0000-0002-2775-7172
,
Ting Lan
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Petia Topalova 0000000404811396 https://isni.org/isni/0000000404811396 International Monetary Fund

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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 030
Language:
English
Publication Date:
10 Feb 2023
DOI:
https://doi.org/10.5089/9798400234385.001
ISBN:
9798400234385
ISSN:
1018-5941
Pages:
25
Keywords:
inflation; Phillips curve; slack; external price; backward-looking; inflation surge; benchmark Phillips Curve estimation; inflation model; inflation dynamics; inflation development; Energy prices; Food prices; Inflation persistence; COVID-19; Europe; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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In 2021-22, inflation in Europe soared to multidecade highs, consistently exceeding policymakers’ forecasts and surprising with its wide cross-country dispersion. This paper analyzes the key drivers of the inflation surge in Europe and its variation across countries. The analysis highlights significant differences in Phillips curve parameters across Europe’s economies. Inflation is more sensitive to domestic slack and external price pressures in emerging European economies compared to their advanced counterparts, which contributed to a greater passthrough of global commodity price shocks into domestic prices, and, consequently, to larger increases in inflation rates. Across Europe, inflation also appears to have become increasingly backward looking and more sensitive to commodity price shocks since the onset of the COVID-19 pandemic. This finding helps explain why conventional (Phillips curve) inflation models consistently underpredicted the 2021-2022 inflation surge, although it remains too early to conclude there has been a structural break in the inflation process.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2023: Issue 030