Origins of post-COVID-19 inflation in Central European countries

This paper examines the post-pandemic surge in inflation across the Visegrád Group countries (Czechia, Hungary, Poland, and Slovakia), which recorded some of the highest inflation rates in the European Union. Using a Bayesian structural vector autoregression model with sign-zero restrictions and block exogeneity, we analysed the contributions of domestic and foreign shocks to inflation dynamics. Our findings revealed that while foreign demand and non-energy supply shocks played a significant role in driving inflation, domestic factors accounted for cross-country differences in inflation rates. Specifically, supply-side shocks emerged as the primary domestic driver across all countries, whereas exchange rate shocks had a pronounced impact in economies with their own currencies. Conversely, monetary policy shocks had a minor effect, suggesting that central banks acted according to their estimated reactive functions and did not resort to further tightening to subdue inflation. These findings apply to both headline and core inflation.