ECB Research Bulletin Pre-Release: Supply Side Shocks to Remain Relevant to Inflation
19 March 2024
By Isabel Teles – FRANKFURT (Econostream) – Supply side shocks have made a large contribution to core inflation in the euro area and are likely to continue to be relevant, according to findings presented in a research bulletin pre-release published Tuesday by the European Central Bank.
The combination of supply chain, gas and oil price shocks during the post-pandemic recovery all pushed inflation in the same direction, the authors of the bulletin said.
‘We argue that a sizeable part of the recent surge in inflation has been driven by supply side factors, with those related to gas prices and global supply chain bottlenecks playing a prominent role. Such factors are likely to continue to be relevant in explaining future inflation dynamics’, they said.
Some central banks highlight core inflation in their communications, due to the volatility of headline inflation, the authors said, noting that core inflation however ‘can at times be affected by sizeable supply-side shocks, as happened after the pandemic.’
The authors proposed a framework to estimate how core inflation would have developed without those shocks, which would allow policy makers to look through the shocks.
‘A counterfactual measure of core inflation that excludes the effects of energy shocks and global supply chain shocks has been more stable after the pandemic, although it too increased to record levels’, they said.
‘New types of inflation drivers may materialise in the future’, the authors said. ‘An important feature of the model we propose is its adaptability in incorporating new variables and shocks as they become relevant.’