What drives core inflation? The role of supply shocks

Considering key lessons from the post-pandemic high inflation episode, we propose a framework to understand euro area core inflation which: (i) accounts for a rich set of drivers and (ii) identifies “new” shocks, associated to gas prices and to global supply chain bottlenecks. We propose a structural BVAR with a factor structure in the reduced-form residual, an outlier correction, and treatment of ragged edges. We find that supply shocks explain most of the inflation surge, while monetary policy shocks played a limited role. An adjusted core inflation rate, abstracting from shocks linked to energy or supply chain bottlenecks, was more stable but still increased to record highs. JEL Classification: E31, C32, C38