Why the drivers of inflation matter for monetary policy

1 September 2026

By Kristina Barauskaitė Griškevičienė and Claus Brand

Inflation has risen again in 2026, partly because the war in the Middle East has pushed up energy prices. At first glance, this may look similar to the inflation surge of 2021-22, which also started with higher energy prices, but the causes are different. In 2021-22 several powerful forces came together: pandemic-related supply shortages, strong demand after lockdowns, higher energy costs and public policy support. In 2026, by contrast, the rise in inflation has so far been driven almost entirely by higher energy costs. Thus, the two episodes differ fundamentally in the nature and magnitude of the inflation drivers.

These differences in inflation dynamics carry important implications for monetary policy. While the ECB raised interest rates forcefully and persistently in response to the 2021-22 surge, the monetary policy response to the current episode has been more gradual. This blog post examines both inflation episodes and explains why the difference in inflation drivers calls for two distinct policy approaches.

Two inflation episodes – two different stories

To compare the two inflation episodes, we use a comprehensive time-series model. It identifies supply and demand imbalances as key inflation drivers – whether linked to energy, public policy or other factors. Our main tool is a Bayesian vector autoregression (BVAR) model which looks at euro area data from January 2007 to May 2026. The model incorporates a comprehensive set of macroeconomic variables, enabling us to identify key drivers of headline HICP inflation and HICP energy inflation.^[1] These drivers include pandemic-related demand and supply imbalances; adverse energy supply shocks (capturing broad energy price developments, including gas and electricity prices); fiscal policy measures; and both conventional and unconventional monetary policy instruments.

As noted above, our estimates suggest that the current increase in headline inflation has so far, until end of May 2026, been driven almost entirely by adverse energy supply shocks. These shocks stem from energy price increases caused by the Middle East conflict and the closure of the Strait of Hormuz. By contrast, the 2021-22 inflation surge was driven by a combination of large and unprecedented supply and demand-side factors. Energy played a role, but not an exclusive one. Supply-side factors included global supply chain disruptions and energy supply shocks, particularly as a result of Russia’s invasion of Ukraine. Demand-side factors included a rapid post-pandemic rebound in demand, compounded by accommodative fiscal and monetary policies.

Between January and May 2026, headline inflation rose by 1.5 percentage points, from 1.7% to 3.2%. This increase can be attributed almost entirely to energy supply shocks (fourth bar in Chart 1, panel a), while monetary and fiscal policy have exerted only marginal downward pressure on inflation (-0.1 and -0.2 percentage points respectively).

Chart 1

What drives inflation? Headline and energy inflation compared

a) Drivers of headline HICP inflation	b) Drivers of HICP energy inflation
(percentage points and percentage point contributions)	(percentage points and percentage point contributions)

By contrast, a much broader mix of factors lay behind the 2021-22 inflation surge. That mix included adverse energy supply shocks and pandemic-related supply and demand imbalances. Together, these factors explained around 90% of the surge. The inflation dynamics were initially dominated by supply factors, after which demand factors became more prominent.^[2] Adverse energy supply factors made an important but not predominant contribution of 2.4 percentage points to the inflation surge. Two pandemic-related factors – non-policy aggregate demand and non-energy supply – accounted for 1.3 percentage points and 0.9 percentage points of the inflation increase respectively (first three bars in Chart 1, panel a).

Public policy – monetary stimulus initially, then fiscal stimulus in particular – also contributed measurably to the 2021-22 inflation surge. Approximately 1.5 percentage points of inflation were attributable to expansionary fiscal and monetary stimulus (0.6 percentage points from fiscal policy and 0.9 percentage points from monetary policy). Specifically, accommodative monetary policy, while supporting economic growth, contributed to the initial increase in inflation until July 2022 (second bars in both Chart 1, panel a), and Chart 2). Subsequently, the Eurosystem’s balance sheet normalisation and a succession of ECB policy rate increases started in July 2022 neutralised this impact (third bar in Chart 1, panel a). That had a measurable tightening effect on inflation and contributed to bringing inflation back down to the 2% inflation target.^[3]

2026 energy inflation – supply, not demand

Comparing driving factors behind energy prices in both episodes confirms that inflation in 2026 has been predominantly characterised by energy shocks. Adverse energy supply factors accounted for around 90% of the increase in energy inflation between January and May 2026. During this period, monetary and fiscal policies have exerted only slight downward pressure on energy inflation (fourth bar in Chart 1, panel b).

The importance of energy as an almost exclusive driving factor stands in sharp contrast to the 2021-22 episode. At that time, beyond energy supply shocks, there were also demand factors driving energy inflation, including monetary and fiscal policy. The latter effect came from the lingering impact of pandemic-era and energy-related fiscal support to aggregate demand (second and third bars in Chart 1, panel b). Specifically, while initially energy prices spiked in 2021 owing to energy supply disruptions, their subsequent rise in 2022 occurred at least partly because of factors unrelated to energy supply, including demand. In 2026, by contrast, energy inflation in the euro area has so far been a more straightforward supply-side story.

The changing drivers behind growth

Developments in economic growth likewise underscore the relative importance of different drivers. During the 2021-22 inflation surge, energy supply shocks suppressed growth and fuelled inflation, while expansionary fiscal and monetary policies supported the post-pandemic recovery. In 2026, however, their impact on growth is different. Euro area growth has persisted despite the Middle East conflict. One reason is that energy prices are estimated to have continued supporting growth. This is due to lagged effects from energy price declines before the start of the war. In addition, firms have been building up stocks to guard against supply chain risks. Conversely, monetary and fiscal policies are estimated to have exerted some downward pressure on growth – a reversal from their inflationary boost during the 2021-22 episode (Chart 2).

What about the AI boom?

Some observers might ask whether our results overlook a potential demand boost from artificial intelligence (AI). If AI investments were adding to demand (in net terms), part of what we attribute to energy or other factors might have shown up as a demand-driven expansion.

Our results do not indicate a general demand boost. AI may well have contributed to aggregate demand or may already have made a difference in specific countries or sectors. A more granular, country and sector-level analysis might well detect significant effects where adoption is more advanced. However, for the euro area as a whole, we do not yet find evidence of a demand boost from private investment that may possibly be due to AI.

What do these findings mean for monetary policy?

What are the implications of these results for monetary policy? Demand-side shocks push inflation and output in the same direction. This causes milder or no stabilisation trade-offs between inflation and output. That makes it easier to adopt a forceful policy response to bring inflation back in line with the inflation target. Supply-side shocks, by contrast, push inflation and output in opposite directions, demanding a more measured monetary policy response.

In 2021-22, sizeable demand-side pressures, accommodative public policies and larger and more sustained inflation shocks called for forceful and persistent monetary policy action. By contrast, the predominantly adverse supply-side nature of the 2026 inflation increase has, to date, prompted a more gradual and flexible monetary policy response in combination with the current data-dependent, meeting-by-meeting approach to monetary policy decision-making. This response is consistent with the ECB’s medium-term monetary policy orientation, as stated in the ECB’s monetary policy strategy statement (2025): “The flexibility of the medium-term orientation takes into account that the appropriate monetary policy response to a deviation of inflation from the target is context-specific and depends on the origin, magnitude and persistence of the deviation” (emphasis added).

In summary, the fact that the energy-supply side nature has dominated the 2026 inflation increase makes it different from the broad mix of demand and supply-side drivers of the 2021-22 surge. This contrast supports the more measured policy response taken so far. The response as delivered to date is consistent with the medium-term orientation of the ECB’s monetary policy and with financial market expectations.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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