The 2021-22 inflation surge in Europe: a Phillips-curve-based dissection

This paper analyzes the drivers of the inflation surge in Europe in 2021-22 and its cross-country variation. The analysis highlights significant differences in Phillips curve parameters across countries. Inflation is more sensitive to slack and external price pressures in emerging Europe, which contributed to a greater passthrough of the global commodity price shocks and higher inflation. Across Europe, inflation also appears to have become increasingly backward looking and more sensitive to commodity price shocks since the onset of the COVID-19 pandemic. This finding helps explain why conventional models consistently underpredicted the 2021-2022 inflation surge.