Euro area inflation shaped by two years of COVID-19 pandemic

This section reviews inflation in the euro area over the 2 years that followed the outbreak of the COVID-19 pandemic and prior to the military aggression of Russia against Ukraine. In line with many key economic indicators, inflation has been very volatile, falling to multi-year lows following the outbreak of the pandemic, before increasing to multi-decade highs at an unexpectedly rapid pace. The pandemic has caused various supply and demand shocks – both aggregate and idiosyncratic in nature. These shocks hit the global economy with varying intensity both across time, as the health crisis evolved, and across sectors, depending on how contact-intensive they are. The shocks, and the substantial policy response put in place to cushion their impact, have played a key role in overall and relative price movements over the past 2 years. The section assesses and discusses how large swings in commodity prices (particularly energy), disruptions to the supply side of the economy, and compositional shifts in demand towards spending on goods have impacted prices and inflation. It also illustrates the high degree of uncertainty that remains about the short-term outlook for inflation and how this may affect views on longer-term inflation.