Inflation dynamics and monetary policy under relative price shocks: Evidence from the United States, the Euro Area, and Peru

This paper studies how inflation dynamics and monetary policy respond to global energy price shocks, global supply chain shocks, and food price shocks. Using an externally augmented Bayesian structural VAR with sign and zero restrictions, we find strong cross-country heterogeneity: global energy price shocks and supply-chain shocks dominate inflation fluctuations in the United States and the euro area, whereas in Peru food price shocks generate larger inflation responses with stronger spillovers to inflation expectations. The monetary policy response also differs across economies: advanced economies react more strongly to global energy and supply-chain shocks, while Peru appears to respond more strongly to food inflation pressures within the context of the empirical framework. Our findings suggest that differences in consumer price index (CPI) composition are a key factor determining whether energy or food price shocks have a larger macroeconomic impact.