One Global Shock, Many Inflation Paths: Inflation Persistence After the Great Moderation

Why It Matters

Higher‑than‑expected inflation floors reshape wage negotiations, savings behavior, and central‑bank strategy, signaling a lasting shift from the Great Moderation’s stability.

Key Takeaways

• Energy-price pass‑through doubled after COVID, raising inflation persistence
• Prior inflation history predicts post‑pandemic price stability across countries
• Fossil‑fuel subsidies temporarily blunt energy shock transmission to CPI
• Inflation‑targeting regimes reduce but do not eliminate shock pass‑through
• Supply‑chain fragmentation makes economies more shock‑sensitive than during Great Moderation

Pulse Analysis

The post‑pandemic era has upended the narrative of a fleeting inflation spike. While headline rates fell in many nations, they have anchored above the low‑inflation floor that characterized the Great Moderation, reflecting permanent price‑level shifts and recurring supply disturbances such as geopolitical tensions and energy market fragmentation. This new environment forces policymakers to reconsider whether inflation can ever revert to its pre‑COVID trajectory or if a structurally higher baseline is now the norm.

A recent IMF working paper isolates two decisive variables that explain why some countries endured persistent inflation while others recovered more quickly. Nations with a legacy of higher inflation and those hit by larger domestic energy‑price shocks experienced the strongest and most durable price pressures. Empirical analysis shows that the cumulative impact of a 1 % energy‑price rise on CPI inflation roughly doubled after COVID, indicating a fundamental change in transmission mechanisms. Intriguingly, temporary fossil‑fuel subsidies were found to curb this pass‑through, suggesting that short‑term fiscal smoothing can interrupt the feedback loop between energy costs, wage indexation, and broader price‑setting.

For central banks, the implication is clear: monetary policy alone cannot neutralise large, synchronized supply shocks. Credibility remains vital for anchoring expectations, but the focus must shift toward preventing shock‑induced wage and price spirals from embedding themselves in the economy. Coordinated fiscal measures, such as targeted energy subsidies, may provide a pragmatic bridge, buying time for structural adjustments in supply chains and energy markets. As the global economy settles into a more shock‑sensitive regime, policymakers will need to blend monetary vigilance with strategic fiscal tools to safeguard price stability.