While price growth rates no longer spike to the highs seen earlier, headline inflation remains stubborn, even when energy prices and unprocessed foods are excluded. This persistence fuels ongoing debates about what drives inflation and how best to curb it. The following notes reflect several recent studies that illuminate these questions.
Researchers Mai Chi Dao, Allan Dizioli, Chris Jackson, Pierre-Olivier Gourinchas, and Daniel Leigh examine price dynamics from 2021 onward in both the Eurozone and the United States. They identify distinct yet overlapping patterns on either side of the Atlantic. Energy price shocks have a larger impact in the euro area due to greater exposure to energy costs and deeper reliance on energy imports from geopolitically sensitive regions. Despite these differences, central banks reacted in similar fashion, tightening monetary policy through higher interest rates, though the timing varied because inflation showed earlier signs in the United States.
Across European Union countries, governments deployed temporary measures to soften the blow of higher energy prices for households and firms. Support included subsidies, tax relief, and price caps. These measures helped to moderate inflation expectations and, in turn, slowed the rise in consumer prices and maintained purchasing power. The temporary nature of these policies was crucial, as they did not spur demand so aggressively that monetary policy would be rendered ineffective.
Silvia Albrizio and John Bluedorn emphasize that monetary policy can anchor long-term inflation expectations. They argue that a restrained stance by monetary authorities, even when offset in part by fiscal support aimed at cushioning households and businesses, sends a clear signal that short- and medium-term targets remain attainable. This approach allows the gradual adjustment of policy to align expectations with goals, supporting a smoother path for price levels over time.
However, the transmission of rising costs into final prices and the distributional effects deserve close attention. Niels-Jakob Hansen, Frederik Toscani, and Jing Zhou highlight that rising corporate profits accounted for a substantial portion of inflation acceleration in Europe over the past two years. This trend has amplified price levels beyond what would be warranted by raw energy input costs. Firms have protected earnings from price shocks, while workers have not shared in those gains. That imbalance makes it important to keep long-run inflation expectations steady and encourages a gradual restoration of purchasing power. The crucial questions are how quickly wages will rise and whether firms can absorb higher labor costs without triggering additional price increases.
Uncertainty around geopolitical events, such as intensified regional conflicts, adds another layer of risk. Such scenarios can dampen the confidence of economic agents and complicate the pursuit of price stability by fueling renewed price pressures, particularly in energy markets. In this context, a well-structured monetary policy—deliberate, predictable, and responsive to evolving conditions—remains a central tool. It is most effective when paired with a calibrated mix of policies that balance growth, employment, and income distribution. The economic scars left by the Covid-19 era and the additional strain from the invasion of Ukraine have affected public finances, widening structural deficits and pushing up debt service costs. Returning EU countries to budgetary stability will require prudent, credible rules and a flexible approach that respects the realities of a deeply collaborative Europe. This is a topic for future discussion, but the foundation is being laid now.
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In short, inflation remains a multifaceted challenge shaped by energy markets, corporate pricing power, and the way policies transmit through the economy. The combined weight of monetary restraint, targeted fiscal support, and structural measures offers a path toward steadier inflation and restored purchasing power, while safeguarding growth and employment. The exact pace of these adjustments will hinge on global crises, energy dynamics, and how firms and workers respond to the evolving policy mix.