The false start of disinflation – evidence from the major European economies

Abstract

This paper examines medium-term inflationary risks in the wake of the energy crisis. Firstly, the inflation spillovers between five major EU economies, viz. Germany, France, Italy, Spain, and Poland are analyzed using the Diebold and Yilmaz VAR framework. This analysis reveals that the interconnection between increases in inflation was stronger after the outbreak of the energy crisis. Poland and Spain have been transmitting inflation to the other countries under consideration. This impact is strongest when prices are “sticky”, i.e. when they are changed least frequently. Secondly, the impact of wage pressures in the Eurozone was analyzed with a special emphasis on the Netherlands on account of its historically high frequency of wage strikes. The data show that wage pressures from that country precede similar changes elsewhere in the eurozone. These two factors suggest that returning inflation to central bank targets in Europe is going to be a slow process.

Keywords

• var
• inflation
• spillovers