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The role of demand and supply in underlying inflation – decomposing HICPX inflation into components

Author

Listed:
  • Gonçalves, Eduardo
  • Koester, Gerrit

Abstract

In this box we decompose components of HICP excluding energy and food inflation into those driven predominantly by demand and those driven predominantly by supply shocks. This approach to monitoring inflation was originally developed for the United States. When adapted to the euro area it reveals that both supply and demand factors have contributed strongly to the increase in HICPX inflation since the second half of 2021. Supply factors were dominant at the beginning of the upturn in inflation in the second half of 2021, but demand factors have gradually increased in importance and contributed to a similar extent as supply factors to HICPX inflation over recent months. In recent months, the main contribution to non-energy industrial goods (NEIG) inflation has come from components predominantly driven by supply shocks, whereas services inflation has stemmed more from components predominantly driven by demand. JEL Classification: E31, E32

Suggested Citation

  • Gonçalves, Eduardo & Koester, Gerrit, 2022. "The role of demand and supply in underlying inflation – decomposing HICPX inflation into components," Economic Bulletin Boxes, European Central Bank, vol. 7.
    • Handle: RePEc:ecb:ecbbox:2022:0007:7
    Note: 3015628
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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/focus/2022/html/ecb.ebbox202207_07~8b71edbfcf.en.html
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    Citations

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    Cited by:

    1. Sandra Eickmeier & Boris Hofmann, 2022. "What drives inflation? Disentangling demand and supply factors," BIS Working Papers 1047, Bank for International Settlements.
    2. Galstyan, Vahagn, 2023. "Understanding the Joint Dynamics of Inflation and Wage Growth in the Euro Area," Research Technical Papers 11/RT/23, Central Bank of Ireland.
    3. Lo Duca, Marco & Moccero, Diego & Parlapiano, Fabio, 2024. "The impact of macroeconomic and monetary policy shocks on credit risk in the euro area corporate sector," Working Paper Series 2897, European Central Bank.
    4. Mario Carceller del Arco & Jan Willem van den End, 2023. "Robust monetary policy under shock uncertainty," Working Papers 793, DNB.

    More about this item

    Keywords

    euro area; inflation; supply-demand;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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