The Nature of the Inflationary Surprise in Europe and the USA

This paper leverages insights from data and economic theory in order to construct a narrative account of how the nature of inflation has evolved over time in the euro area, United Kingdom and United States since the onset of the Covid-19 pandemic. To this end, I decompose the recent 'inflationary surge episode' into four periods: The Covid shock period (2020 Q1 – 2020 Q2), characterised by joint a negative demand and supply shock; the economic reopening period (2020 Q3 – 2021 Q4), characterised by conflicting positive demand and negative supply shocks; the post-reopening period (2022 Q1 – 2023 Q1), also characterised by conflicting positive demand and negative supply shocks, where the latter is driven by an exogenous increase in energy prices; and the post-energy shock period (2023 Q2 – present), characterised by falling consumer price index (CPI) inflation alongside still-elevated and broad-based underlying inflationary pressures. Having established this 'inflation story', I conclude with some brief comments on the European Central Bank, Bank of England and Federal Reserve monetary policy responses during this time.