A0616
Title: What drives core inflation? The role of supply shocks
Authors: Elena Bobeica - European Central Bank (Germany) [presenting]
Marta Banbura - European Central Bank (Germany)
Catalina Martinez Hernandez - European Central Bank (Germany)
Abstract: A framework is proposed to identify structural drivers of inflation in the euro area in order to understand the role of the multiple inflationary sources that simultaneously manifested during the post-pandemic recovery. A rich set of variables is explored and in particular, various types of supply shocks are analysed, some of which were not considered relevant before the pandemic. The model is a medium-size Bayesian VAR with a factor structure in the residuals. The shocks are identified via zero and sign restrictions on the factor loadings. It is found that inflation in the post-COVID period has been driven mainly by supply-side shocks. Those linked to global supply chain pressures and gas prices have exhibited a much larger and more persistent influence than in the past. Despite being simple and easy to communicate, core inflation can be at times impacted by large temporary shocks, especially from the supply side. Being able to see through that is crucial for policymaking. A counterfactual core inflation measure net of energy and supply-side bottlenecks effects has been more stable after the pandemic.
