Unveiling inflation: Oil shocks, supply chain pressures, and expectations

After decades of low and stable inflation, advanced economies experienced a sharp and persistent surge in inflation following the COVID-19 pandemic. While many studies have examined the sources of this inflation, less attention has been paid to how domestic inflation expectations amplify global shocks. This paper makes a novel contribution by quantifying that amplification mechanism across six advanced, inflation-targeting economies: the United States, Canada, New Zealand, the Euro Area, the United Kingdom, and Norway. Using a structural Bayesian vector autoregression model, we jointly identify global demand and supply shocks, including various oil market shocks and global supply chain disruptions, as well as domestic shocks to inflation and inflation expectations. We show that these global shocks were key drivers of the post-pandemic inflation surge in all countries studied. Importantly, our counterfactual analysis reveals that inflation expectations have significantly amplified the transmission of global shocks, particularly in Canada, New Zealand, and the US. These findings demonstrate that the interaction between global forces and country-specific expectations is central to understanding inflation dynamics, and underscore the importance of managing inflation expectations as a tool to mitigate persistent inflation.