Source: European Parliament
This paper examines the factors that influence the persistence of inflation following energy price shocks. Although the current oil price shock is economically significant, it is less likely to generate persistent inflationary pressures than the energy crisis of 2022–23, as European gas markets remain relatively stable. Nevertheless, elevated geopolitical uncertainty and households’ recent inflation experience may increase the risk of second-round effects. Model simulations suggest that the long-term welfare costs of responding too cautiously to renewed inflationary pressures may exceed those associated with a somewhat stronger monetary policy response.
Kerstin BERNOTH, Alexander KRIWOLUZKY
Economics and Monetary Issues