Energy Supply Shocks Drive Current Inflation Surge

The recent rise in inflation is driven by different factors than the pandemic-era surge. The main driver of current inflation is energy supply shocks, particularly from the Middle East conflict and the closure of the Strait of Hormuz.

This contrasts with the previous inflation surge in 2021-22, which was caused by a combination of supply and demand-side factors. Energy prices played a role, but were not the sole driver. Supply chain disruptions, global energy supply shocks, and Russia's invasion of Ukraine all contributed to this surge.

The drivers of current inflation have important implications for monetary policy. The European Central Bank responded more gradually to the current episode than it did to the previous one, raising interest rates less forcefully.