Supply chains increase European inflation and output risks

Global supply chain disruptions are a growing source of inflationary pressure and macroeconomic volatility across Europe.

Recent events, including the COVID-19 pandemic and geopolitical conflicts, demonstrate how rapidly global disturbances can impact prices and economic output within the EU.

The increasing interconnectedness of production networks and rising geopolitical tensions have amplified supply chain risks.

Disruptions in specific intermediate inputs or critical raw materials can trigger large, persistent, and unevenly spread inflationary effects, complicating macroeconomic stabilisation efforts.

The study quantifies these macroeconomic effects, noting that the inflationary impact is uneven and can rise sharply during severe episodes.

Direct price effects are stronger for goods than for services, especially where production relies heavily on imported inputs.

Large shocks generate disproportionately stronger price effects than smaller ones, indicating that severe episodes create materially larger inflation risks than average historical effects.

The study highlights that there is no single, standard monetary policy response to supply-driven inflation in the euro area.

The appropriate reaction depends on the disruption's nature: its temporariness, persistence, and impact on prices versus production.

Temporary inflation increases may be "looked through" by central banks to avoid unnecessary output weakening.

However, larger and more persistent shocks, likely to feed into wages and expectations, warrant policy tightening even at the expense of output.

The analysis also maps product-level supply chain risks using disaggregated trade data and production networks.

It identifies products with highly concentrated country-level supply that are critical for defence, medical supply, energy transition, and digital infrastructure.

This product-level view helps to prioritise government interventions where they are most likely to reduce risk.