What brought US and euro area inflation down between 2022 and 2023?

Ben S. Bernanke (Brookings Institution) and Olivier Blanchard (PIIE)
What brought US and euro area inflation down between 2022 and 2023?


US inflation fell from its peak in 2022 Q2 of 9.97 percentage points to 2.69 in 2023 Q2, and euro area inflation fell from 9.43 percentage points in 2022 Q2 to 2.57 in 2023 Q2.

This PIIE Chart illustrates the main economic components fueling the decline in inflation in the two economies. It builds on previous research indicating that strong price shocks, particularly in energy and food, help to explain most of the increase and later decrease in the recent inflation.

The price shocks were especially pronounced in energy and food. Initially low energy prices in 2020 kept inflation at bay but spurred inflation as they rose in 2021 and most of 2022. Subsequent declines in energy prices in the United States and the euro area have led to declines in inflation more recently. Food price shocks have followed a different pattern: Their contribution to inflation was small until 2022, then consistently significant in 2022 and even more so in 2023. Supply shortages in general continue to contribute significantly to inflation in 2023 Q2 but less so since peak inflation in 2022 Q2.

On the other hand, as the pandemic-induced disruptions dissipated, the labor market grew tighter in many countries than in the pre-COVID period in nearly all cases by the end of the date range analyzed. Initially, the labor market played a limited role in the evolution of price inflation in the United States and the euro area. Labor market contributions to inflation were consistently smaller than those from price shocks. That tightness, along with a small increase in long-run inflation expectations, has slowly led to wage inflation in some countries. More recently, as price shocks have partly reversed, the labor market factor has grown, although inflation is still buffeted by positive and negative price shocks.

An encouraging finding is that there is little evidence, in the United States and also other economies, that a wage-price or price-wage spiral emerged comparable to the high-inflation episodes of the 1970s, when increases in the prices of oil and other commodities led to demands for higher nominal wages, which fed on each other. The debate over whether the inflation spike of 2021–22 was temporary ("Team Transitory") or long lasting ("Team Permanent") continues without full resolution. Team Transitory was right that shocks to prices (e.g., for energy and food) would have short-lived effects on inflation, but it did not anticipate that there would be such a long sequence of shocks, leading to an extended period of inflation.  Team Permanent was right to worry about labor market tightness but significantly overestimated its likely contribution to inflation early on.

This PIIE Chart is adapted from Ben S. Bernanke and Olivier Blanchard's Working Paper, An analysis of pandemic-era inflation in 11 economies.

More From

More on This Topic