How have firms' price increases contributed to the current inflation in the euro area?

Soňa Benecká

A chapter in CNB Global Economic Outlook - September 2022, 2022, pp 14-18 from Czech National Bank, Research and Statistics Department

Abstract: The story of today's inflation in the euro area started last year after the pandemic shutdowns when companies had to grapple with shortages of parts and materials amid almost sky-rocketing prices of commodities and transport. The circumstances for growth in prices and corporate sales were favourable. Demand had shifted from services to goods, and households had seen an increase in their "rainy day funds" during the shutdowns. This analysis confirms that companies actually did increase their prices during this period more than would be expected based on historical data. Price increases were more pronounced in countries which entered the pandemic with a "more overheated", i.e. much tighter labour market and stronger domestic demand. However, prices cannot go up indefinitely. Producers are starting to ease the pass-through to prices, not only in the production sector, but also with respect to end consumers. However, we are still not at prepandemic pricing. The pressure to increase prices remains considerable. So are price increases driven by costs? Evidently so. Input costs in particular are putting pressure on companies but - after a decade of fighting deflation - robust demand has made room for the burst of high inflation currently being observed.

Date: 2022
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