Inflation Dynamics in the US and Euro Area: During and Post Covid-19 Analysis

This thesis examines the drivers of inflation in the United States and the Euro Area during and after the COVID-19 pandemic, with a focus on the role of fiscal policy and the interaction between demand and supply shocks. While early narratives emphasized a sharp transatlantic divide, demand-led inflation in the U.S. and supply-led inflation in the Euro Area, recent evidence points to a more nuanced reality. By critically reviewing the literature, this study finds that demand forces, including large fiscal expansions, were central to inflation dynamics in both economies, while supply shocks, particularly energy price increases, amplified and prolonged inflation in the Euro Area. Fiscal–monetary interactions were decisive: in both regions, fiscal loosening coincided with accommodative monetary policy, reinforcing inflationary pressures. International spillovers, especially from U.S. fiscal stimulus, further linked inflationary outcomes across borders. The analysis highlights the structural challenges of managing inflation in a monetary union with fragmented fiscal policies, as well as the need for stronger global coordination in addressing crisis-driven inflation. The findings underscore that inflation in the post-COVID era cannot be reduced to a single narrative but reflects the reinforcing interplay of demand, supply, and policy shocks.