IMF: Energy Prices Accounts for 85% of Global Inflation Divergence

A new study by the International Monetary Fund has warned that the global inflation surge following the COVID-19 pandemic exposed sharp differences between economies despite facing broadly similar international shocks, with local inflation histories and energy prices emerging as the dominant drivers behind post-pandemic price trends.

The study, titled “One Global Shock, Many Inflation Paths: Explaining Inflation Divergence After the Pandemic,” found that supply chain disruptions, alongside surging food and energy prices, played a central role in accelerating inflation worldwide after the pandemic.

However, researchers concluded that countries entering the pandemic with historically low and stable inflation experienced significantly smaller price increases than economies with a prolonged record of elevated inflation.

According to the study, domestic energy price shocks alone explained nearly 85% of the variation in inflation rates across countries during the post-pandemic period, underscoring the outsized influence of energy markets on consumer prices globally.

The IMF analysis also showed that the transmission of higher energy costs into broader inflation was considerably stronger in emerging markets, economies without formal inflation-targeting frameworks, and countries that provided limited fossil fuel subsidies.

In contrast, several traditional economic indicators, including levels of economic development, trade openness, institutional quality, and even monetary and fiscal policy settings, showed limited direct influence in explaining inflation differences among countries during the same period.

The study’s authors stressed that central bank credibility and the ability to anchor inflation expectations have become critical tools in confronting recurring global shocks, particularly amid escalating geopolitical tensions and ongoing volatility in global food and energy markets.

The findings come as policymakers worldwide continue grappling with the lingering effects of the post-pandemic inflation cycle and the challenge of balancing economic growth with price stability in an increasingly uncertain global environment.