Inflation Persistence in the G7: The Effects of the Covid-19 Pandemic and of the Russia-Ukraine War

Abstract

This note analyses how shocks caused by the Covid-19 and the Russia-Ukraine crisis impact on inflation persistence G7 countries. Using data ending at December-2019, high estimates of the persistence parameter d indicate a strong persistence of inflation. The unit root hypothesis could not be refuted for Germany, Japan, and the United States, while this hypothesis is rejected in favour of higher orders of integration in the remaining cases. Expanding the dataset to include the pandemic and the Russia-Ukraine crisis reveal that d-values remain significantly elevated across all countries, reinforcing the persistence of inflation. Interestingly, Canada, previously excluded from the group, now aligns with Germany, Japan, and the United States. This suggests a change in inflation dynamics for Canada during these extraordinary periods. Additionally, employing a recursive estimate reveals a slight increase in inflation persistence for most countries, except Japan, which exhibits an almost flat trend in the evolution of the differencing parameter.