Inflationary Pressures in the Conditions of Global Uncertainties: Evidence From Developed European Economies

Abstract

This paper analyzes the key macroeconomic consequences that are directly determined by the pandemic and geopolitical crisis in the form of growing inflationary pressures, reflecting a high level of uncertainty during decision-making and planning at the individual, business and macroeconomic level. The subject of the econometric analysis aims to see how the movement of oil prices affects the consumer price index (CPI) on a sample of 15 developed European economies in the period from 2020q1-2023q4. Using heterogeneous panel models, specifically Mean Group (MG), and Pooled Mean Group (PMG) methods positive and heterogeneous impact of the increase in the price of crude oil on CPI is detected. Research indicates that the long-run relationship and speed of adjustment of individual economies to the long-run equilibrium relationship is heterogeneous during the analyzed period, indicating that the effect of macroeconomic uncertainties represented in crude oil price increase had different magnitude of influence in developed European economies. Individual adjustments were the most intensive in Greece, France, and Portugal, meaning that those economies were more exposed to higher inflationary pressures, while a slower intensity of adjustment and lower inflationary pressures were present in Austria, Belgium, Finland, and Luxembourg. Detected vulnerability of developed European economies in the circumstances of global uncertainties is expected due to absence of mechanisms to achieve countercyclical effects on the growth of inflation.