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What Drives the Recent Surge in Inflation? The Historical Decomposition Roller Coaster

Author

Listed:
  • Drago Bergholt
  • Fabio Canova
  • Francesco Furlanetto
  • Nicolò Maffei-Faccioli
  • Pål Ulvedal

Abstract

What drives the recent inflation surge? To answer, one must decompose inflation fluctuations into the contribution of structural shocks. We document how whimsical such a shock decomposition can be in standard vector autoregression (VAR) models. We show that the deterministic component of the VAR is imprecisely estimated, making the shock contributions poorly identified. Our preferred approach to solving this problem can massively shrink the uncertainty around the estimated deterministic component. Once this uncertainty is accounted for, demand shocks appear as the main drivers of the inflation surge in the United States, the euro area, and four small open economies.

Suggested Citation

  • Drago Bergholt & Fabio Canova & Francesco Furlanetto & Nicolò Maffei-Faccioli & Pål Ulvedal, 2026. "What Drives the Recent Surge in Inflation? The Historical Decomposition Roller Coaster," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(4), pages 34-63, October.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:4:p:34-63
    DOI: 10.1257/mac.20240209
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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