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Supply or Demand, that is the Question: Decomposing Euro Area Inflation

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  • Paolo Pasimeni

    (European Commission)

Abstract

This paper studies the recent trends in inflation in the euro area and estimates to what extent the current inflationary pressures are driven by demand expansion and by supply side disruptions. First of all, consumer price inflation is particularly pronounced in goods and less so in the case of services. Energy and food are the most relevant components of rising consumer prices, accounting for almost three-quarters of total headline inflation. The fact that price pressure comes mainly from sectors with a high import content suggests that disruptions along international supply chains may play a key role. The paper then focuses on producer prices at the sectoral level and presents a methodology to decompose the rise in inflation between supply and demand impulses. It finds that, in the present context, supply factors are the main driver and account for at least 80% of the current increase in producer prices in industry and in each one of the manufacturing sectors with the highest price pressures. There are nevertheless some differences across countries. These findings imply that, if repairing supply-side problems and disruptions along supply chains is the priority, then promoting the right investment may be more urgent than cooling demand down. Country heterogeneity in the relative importance of demand and supply factors, then, may lead to different degrees of effectiveness of monetary policy and to a risk of divergences.

Suggested Citation

  • Paolo Pasimeni, 2022. "Supply or Demand, that is the Question: Decomposing Euro Area Inflation," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(6), pages 384-393, November.
  • Handle: RePEc:spr:intere:v:57:y:2022:i:6:d:10.1007_s10272-022-1092-z
    DOI: 10.1007/s10272-022-1092-z
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    1. Nicola Acocella & Paolo Pasimeni, 2018. "The "uncovered inflation rate parity" condition in a monetary union," FMM Working Paper 28-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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    Cited by:

    1. Simone Giuseppe & Pianta Mario, 2023. "Understanding Inflation: The Italian Case," Intereconomics: Review of European Economic Policy, Sciendo, vol. 58(1), pages 17-21, January.
    2. Jean-Guillaume Sahuc & Grégory Levieuge & José Garcia-Revelo, 2024. "Revisiting 15 Years of Unusual Transatlantic Monetary Policies," Working Papers hal-04563708, HAL.
    3. Pianta, Mario, 2023. "Inflation and distributive conflicts," MPRA Paper 119345, University Library of Munich, Germany.

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    More about this item

    Keywords

    C83; E31; E37; L6;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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