In the immediate aftermath of the COVID pandemic, inflation in most countries rose substantially, and by the end of 2023, it had already subsided significantly, if not returned to levels consistent with price stability. This inflation mountain was naturally a global concern, especially for developed world central banks that were not used to battling high inflation. Central banks in the Eurozone, the US, the UK and elsewhere were shocked, albeit briefly, by inflation approaching or exceeding double digits. Even Japanese inflation is showing signs of regaining vigor after three decades of deflationary concerns. Our post-COVID inflation story is shaped by the developed world experience.
This is surprising. Developed countries have not seen such inflationary pressures since the 1970s. Until the 21st century, inflation was mostly an issue for emerging countries, but in the 21st century, with a few exceptions, it was no longer an issue in emerging countries either, and was discussed as such. How has post-COVID inflation played out in emerging countries? In this paper, we look at a subsample of emerging Europe to answer this question.
Emerging Europe differs from “normal” emerging markets like many Latin American countries in that most of these countries in the 1980s were not market economies and in the 1990s were considered transition economies rather than emerging. That said, for the most part, they were similar to other emerging markets in the 21st century before COVID-19. Inflation was largely contained, and although their per capita income levels have earned them the label “emerging,” in the policy space they were behaving similarly to what textbook analyses recommend for developed countries. Emerging Europe's inflationary rises and falls appear similar to those in developed countries, but whether the mechanisms are similar is another question. What were the drivers of inflation and disinflation in emerging Europe? To what extent were they similar or different to each other and to developed countries?
To judge emerging Europe, it is useful to have a benchmark. Although Switzerland is certainly a European country and certainly not an emerging market, its post-COVID inflation trajectory is very instructive. There are expected peaks, but the peak is below 3.5% and inflation is already back on target (below target as of July 2024). Apparently, it was possible to have some inflation but not let it get out of hand. Its impressive inflation track record, despite being part of the European economic policy, political and security environment, makes Switzerland a very useful benchmark for emerging European countries. We also provide a comparison with the Eurozone, because a study of the European economy is incomplete without reference to the aggregate of the largest economies in its neighborhood.
Naturally, analyzing inflation trends precisely is not easy. But it is possible to rule out some hypotheses and see which factors are likely to have played a dominant role. Much of the evidence presented below will not be enough on its own to convince skeptics, but taken as a whole it tells a compelling story. Emerging Europe has, for the most part, been very similar to developed countries such as the Eurozone, and post-COVID inflation trends have indeed been transitory and driven in particular by energy prices.
Read the full paper here.
