The return of inflation: what are its causes and will it persist?
At the beginning of the year 2022, inflation hit absolute record levels in the euro area and the United States. This article sheds light on the causes of these huge price rises: many factors, mostly related to the pandemic, have interacted to cause a “perfect storm” on the inflation front since mid-2021. Among the causes examined in detail, there are rising energy prices, supply problems affecting global value chains, and political choices made in response to the pandemic and their effects on demand for goods and services (as well as differences between the United States and the euro area). While several pandemic-related factors had started to ease since the beginning of 2022, the war in Ukraine triggered a new upsurge in prices since the end of February 2022.
The article afterwards also examines the extent to which the current inflation spike is persistent. To answer this question, it does not only analyse inflation expectations, but also studies the labour market situation in the US and the euro area. This is important as labour market tightness leads to higher wage demands, which, in turn, can cause a "second-round" of price increases.