IMF: Energy Pass-Through Explains Post-COVID Inflation Divergence
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This IMF working paper investigates why similar global supply shocks during the pandemic produced vastly different inflation trajectories across countries. Analyzing 130 economies through cross-country regressions and local projections for 70 advanced and emerging markets, the authors find that pre-pandemic inflation history and the magnitude of domestic energy price shocks explain the vast majority of inflation divergence. Conversely, development levels, exchange rate regimes, inflation targeting, governance quality, and most short-term policy adjustments offer limited explanatory power. The core conclusion emphasizes that post-COVID inflation divergence primarily stems from how supply shocks penetrate domestic price systems, alongside pre-existing inflation credibility and expectation anchoring. Notably, the pass-through of energy prices to headline inflation strengthened significantly after the pandemic, especially within emerging markets, non-inflation-targeting economies, and nations that expanded fossil fuel subsidies less aggressively. Together, historical inflation trends and post-pandemic energy inflation account for approximately 85% of cross-country inflation variance. The authors caution that while institutional quality matters, conventional macroeconomic fundamentals and short-term policy variables mostly lack direct explanatory power once historical inflation and energy shocks are controlled for. Going forward, geopolitical fragmentation and climate transition may increase supply shock frequency, making expectation anchoring and credible energy policy design critical for mitigating inflation persistence.
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