The 2020-2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection

IMF Working Papers, February 10, 2023

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Canonical URL: The 2020-2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection

Timeframe analyzed: 2021-22.
Core focus: drivers of the inflation surge in Europe and cross-country variation using a Phillips-curve framework.
Key methodological element: benchmark Phillips Curve estimation and comparison of Phillips curve parameters across European economies.
Paper details: Pages: 25; Volume: 2023; Issue: 030; Series: Working Paper No. 2023/030; Stock No: WPIEA2023030; DOI: https://doi.org/10.5089/9798400234385.001; ISBN: 9798400234385; ISSN: 1018-5941. Publication date: February 10, 2023.

Magnitude and dispersion
- Inflation in Europe in 2021-22 soared to multidecade highs, consistently exceeding policymakers’ forecasts and exhibiting wide cross-country dispersion.
Cross-country differences in Phillips curve parameters
- Emerging European economies: inflation is more sensitive to domestic slack and external price pressures.
- Advanced European economies: lower sensitivity of inflation to domestic slack and external price pressures relative to emerging counterparts.
- Consequence: greater passthrough of global commodity price shocks into domestic prices for emerging economies, contributing to larger increases in inflation rates.
Changes in inflation dynamics since COVID-19
- Across Europe, inflation appears to have become increasingly backward looking since the onset of the COVID-19 pandemic.
- Inflation also appears to have become more sensitive to commodity price shocks since the onset of the COVID-19 pandemic.
Model performance and interpretation
- Conventional (Phillips curve) inflation models consistently underpredicted the 2021-2022 inflation surge.
- The authors note it remains too early to conclude there has been a structural break in the inflation process.

Subject: COVID-19, Energy prices, Food prices, Health, Inflation, Inflation persistence, Prices
Keywords: backward-looking, benchmark Phillips Curve estimation, COVID-19, Energy prices, Europe, external price, Food prices, Global, inflation, inflation development, inflation dynamics, inflation model, Inflation persistence, inflation surge, Phillips curve, slack

Higher passthrough of global commodity shocks to emerging European economies implies asymmetric inflation pressures across the region during global commodity price shocks.
Increased backward-looking behavior and greater sensitivity to commodity prices help explain why standard Phillips-curve-based forecasts missed the 2021-2022 surge.
Uncertainty remains about whether observed changes represent a temporary shift associated with the pandemic and commodity shocks or a more permanent structural change in inflation dynamics.

Source: The 2020-2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection, IMF Working Papers 2023, 030 (February 10, 2023).