The paper analyses the relationship between prices, wages and expected inflation in the euro area, identifying the factors underlying the dynamics observed between 2020 and 2023. To this end, the study uses a modified version of the model proposed by Bernanke and Blanchard in 2023 for the United States.
The study shows that temporary shocks to wage growth have no permanent effects on price inflation in the euro area. On the contrary, temporary price shocks can trigger an endogenous mechanism that leads to a persistently higher price dynamic, fuelled by expectations of further future increases. The increase in inflation that occurred between 2020 and 2023 can be entirely explained by the rise in energy and food prices and by global supply chain bottlenecks, while the dynamics of labour costs played a marginal role.
