17 Jun 2022

Demand- and supply-side factors behind the higher inflation

The EUROFRAME group of research institutes (CASE, CPB, DIW, ESRI, ETLA, IfW, NIESR, OFCE, PROMETEIA, WIFO) held its eighteenth annual Conference on Economic Policy Issues in Europe in Helsinki on 3 June 2022. The aim of this conference was to bring together academics, and policy-oriented economists by providing a forum for debate on economic policy issues relevant in the European context.
Prof Marek Dąbrowski, CASE Fellow, published paper entitled "Demand- and supply-side factors behind the higher inflation" for The Conference.

"This paper argues that the recent inflation resurgence should not surprise anybody. Inflation has resulted from over ten years of ultra-soft monetary policies. In particular, the asset purchasing programs (APPs) led to building up a substantial inflationary 'overhang' in the form of historically record-high levels of central banks' (CBs) balance sheets (monetary base). Expansionary fiscal policies have also played an important role. That is, demand factors have been the main factor staying behind high inflation. While we do not want to neglect the contribution of adverse supply-side shocks in 2021-2022, in our opinion, they have had secondary importance.

To explain inflationary pressures, we will look at both demand-side (Section 2) and supply-side factors (Section 3). Then we will try to speculate on the potential impact of the war in Ukraine both in terms of demand-side and supply-side factors (Section 4). In section 5, we will analyse monetary policy responses of major CBs and assess whether they have been correct and sufficient. Section 6 will contain conclusions and policy recommendations."

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