Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages
IMF Working Papers, June 23, 2023
Source details
- Canonical URL
- Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages
Other formats
Bibliographic details
- Authors: Niels-Jakob H Hansen, Frederik G Toscani, Jing Zhou
- Published: June 23, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400245473.001
Summary findings
- Import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1.
- Domestic profits account for 45 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1.
- The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches.
- Firms have passed on more than the nominal cost shock and have fared relatively better than workers.
- Available data do not point to a widespread increase in markups.
Quantitative decomposition and mechanics
- Novel consumption deflator decomposition attributes the contributions to inflation over 2022Q1 – 2023Q1 as: import prices = 40 percent; domestic profits = 45 percent.
- The analysis distinguishes effects coming from international commodity price movements versus sector-specific supply-demand mismatches.
Outlook and scenarios
- Assuming nominal wage growth of around 4.5 percent over 2023-24 and broadly unchanged productivity, a normalization of the profit share to the average level over 2015-19 will be necessary to achieve a convergence of inflation to target over the next two years.
- The required normalization of profit share is presented as a condition for disinflation given the assumed nominal wage path and productivity.
Policy implications and recommendations
- Monetary policy will need to remain restrictive to anchor expectations and maintain subdued demand.
- A restrictive stance is necessary so that workers and firms settle on relative price setting consistent with disinflation.
Source: IMF Working Paper "Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages" (authors: Niels-Jakob H Hansen, Frederik G Toscani, Jing Zhou).
Content in this bundle
- Working Paper