One Global Shock, Many Inflation Paths: Explaining Post-COVID Inflation Divergence

IMF Working Papers, May 22, 2026

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Canonical URL: One Global Shock, Many Inflation Paths: Explaining Post-COVID Inflation Divergence

Research question: Why did the post-COVID inflation surge, though globally synchronized, produce widely divergent outcomes across countries?
Scope:
- Cross-country regressions for 130 economies.
- Local projections methods for 70 advanced and emerging markets.

Empirical approaches:
- Cross-country regressions covering 130 economies.
- Local projections for 70 advanced and emerging markets.
Focus areas: structural, institutional, and policy determinants of post-pandemic inflation dynamics.

Primary drivers of cross-country variation:
- Historical inflation accounts for most of the cross-country variation in cumulative post-COVID inflation.
- The scale of domestic energy price shocks accounts for most of the cross-country variation in cumulative post-COVID inflation.
Limited explanatory power:
- Many frequently cited country-specific, macroeconomic fundamentals and institutional features exhibit limited power to explain cross-country variation.
Domestic policy responses:
- The association between post-COVID inflation and domestic policy responses is weak.
- Endogeneity complicates a clear causal interpretation of policy effects.
Pass-through dynamics:
- Pass-through from energy prices to headline inflation intensified markedly in the post-COVID period.
- This intensified pass-through is particularly notable in:
- Emerging markets.
- Non-inflation-targeting regimes.
- Countries that did not expand fossil fuel subsidies.
Implications on transmission:
- Findings highlight the asymmetric transmission of supply shocks.
- Credibility, historical inflation experience, and energy policy design are important in shaping inflation persistence.

Strengthen central bank credibility.
Anchor expectations to bolster resilience against future global supply disruptions.
Consider energy policy design, including the role of fossil fuel subsidies, given their interaction with pass-through dynamics.