The role of demand and supply in underlying inflation – decomposing HICPX inflation into components

Eduardo Gonçalves and Gerrit Koester

Economic Bulletin Boxes, 2022, vol. 7

Abstract: In this box we decompose components of HICP excluding energy and food inflation into those driven predominantly by demand and those driven predominantly by supply shocks. This approach to monitoring inflation was originally developed for the United States. When adapted to the euro area it reveals that both supply and demand factors have contributed strongly to the increase in HICPX inflation since the second half of 2021. Supply factors were dominant at the beginning of the upturn in inflation in the second half of 2021, but demand factors have gradually increased in importance and contributed to a similar extent as supply factors to HICPX inflation over recent months. In recent months, the main contribution to non-energy industrial goods (NEIG) inflation has come from components predominantly driven by supply shocks, whereas services inflation has stemmed more from components predominantly driven by demand. JEL Classification: E31, E32

Keywords: euro area; inflation; supply-demand (search for similar items in EconPapers)
Date: 2022-10
Note: 3015628
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Citations: View citations in EconPapers (10)

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