Is the Inflation Process in Advanced Economies Different After the Pandemic

March 30, 2026

Is the Inflation Process in Advanced Economies Different After the Pandemic?

François de Soyres, Avani Pradhan, and Zina Saijid¹

Nearly six years after the onset of the COVID-19 pandemic, headline consumer price inflation has declined substantially from its 2021-2022 peaks in the United States, the euro area, Canada, and the United Kingdom. In several economies inflation has moved closer to central bank targets, yet price pressures remain elevated across a broad set of goods and services relative to the pre-pandemic period.

In this note, we present our own research on whether this environment reflects a temporary normalization or a change in the underlying inflation process. According to our analysis, inflation remains unusually widespread across categories, the historical relationship between aggregate CPI inflation and diffusion indexes measuring the breadth of inflation has weakened-particularly for the lower tail of price changes-and persistent, broad-based wage growth in services may be contributing to these shifts.

1. Recent behavior of inflation

Inflation rose sharply in 2021-2022 in the United States, the euro area, Canada, and the United Kingdom (Figure 1). Since then, headline inflation has declined substantially from its peak. Over the past year, inflation has been close to 2 percent in Canada and the euro area, while remaining somewhat above target in the United States and the United Kingdom.

Core inflation has followed a similar trajectory but has moderated more gradually. Although down from its highs, core inflation remains above 2 percent across these economies. This contrasts with the pre-pandemic period, when core inflation averaged around 2 percent in the United States and Canada and somewhat below 2 percent in the euro area and the United Kingdom. The recent divergence between headline and core measures suggests that part of the disinflation reflected easing energy prices, while underlying price pressures have proven more persistent.

2. Measuring the breadth of inflation pressures

One way to assess whether inflation pressures are broad-based or concentrated is through diffusion indexes, which measure the share of CPI subcomponents with price changes above or below specified thresholds. Figure 2 shows diffusion indexes for headline inflation in the United States, the euro area, Canada, and the United Kingdom. The red portion represents CPI categories with annual inflation above 3 percent, beige indicates inflation between 0 and 3 percent, and blue shows deflation.

The indexes reveal that even several years after the pandemic, inflation pressures are still more widespread than before 2020 . During 2014-2019, most subcomponents experienced inflation between 0 and 3 percent, with relatively few above 3 percent. In 2022, with pandemic-induced demand-supply imbalances, nearly 80 percent of CPI subcomponents had inflation above 3 percent. Although this share has declined since, it remains elevated relative to pre-pandemic levels, while deflation has become less common.

Figure 3 highlights that the share of the consumption basket experiencing inflation above 3 percent remains well above the 2014-2019 average in all four economies, more than doubling in the euro area and the United Kingdom. Core inflation exhibits a similar pattern (Appendix Figure 1A), indicating broader-based price pressures across categories. This result suggests that inflation has shifted away from being persistently somewhat below target that was characteristic of the pre-pandemic period. Moreover, that inflation is more widespread could suggest a shift in structural drivers of inflation in the post-pandemic period rather than temporary or sector-specific shocks.

3. The pre-pandemic relationship between inflation and diffusion indexes

The observed shift in the breadth of inflation raises the question of whether the underlying inflation process has changed. To benchmark the post-pandemic period, we estimate the relationship between inflation and diffusion indexes during 2000-2019, a period of relatively low and stable inflation.

For each country, we regress 12-month headline and core inflation on diffusion indexes for price changes above 3 percent, between 0 and 3 percent, and below 0 percent. The diffusion index for prices above 3 percent exhibits a strong positive relationship with inflation in most countries, explaining about 80 percent of core inflation movements in the euro area and roughly 50 percent in the United States (Table 1).² Coefficients for the below-0 percent threshold are negative, consistent with higher shares of deflating categories being associated with lower inflation. The explanatory power of these relationships is strongest for the euro area and weakest for Canada.

Table 1: Core Inflation Regression Results

These pre-pandemic estimates provide a benchmark for evaluating whether the observed breadth of inflation in 2024-2025 is consistent with historical patterns, or whether deviations suggest a potential structural shift in the inflation process.

4. Interpreting the post-pandemic relationship of price diffusion indices and inflation

We now examine the implied residuals from the pre-pandemic relationship between core inflation and the diffusion tails. That is, using the coefficients estimated over the pre-2020 sample, we compare actual core inflation after 2020 with the level predicted by the pre-pandemic historical association with the shares of components below 0 percent and above 3 percent.

If the pre-pandemic mapping were still stable, residuals should fluctuate around zero. During the 2021-22 inflation surge, large deviations are unsurprising. More notable is that even after core inflation has moved closer to target in several economies, residuals have not on average returned to zero (Figure 4).³

The most striking result concerns the lower tail. Across economies, the share of components with inflation below 0 percent is associated with persistently positive residuals: core inflation has been stronger than the historical relationship would predict, even given the extent of outright price declines. In other words, the presence of disinflationary components is doing less to pull down aggregate core inflation than it did before the pandemic.

For the upper tail, the picture is more heterogeneous. In the euro area, residuals linked to the share above 3 percent have largely returned to around zero. In the United States and Canada they remain modestly positive but appear to be narrowing, while in the United Kingdom they are still elevated, consistent with persistently higher core inflation there.

Overall, the evidence from our specific analysis points less to a temporary widening of the distribution and more to a change in how dispersion translates into aggregate outcomes.⁴ This result reflects a shift in the association between aggregate inflation and the distribution of price changes across categories, suggesting that the underlying inflation process may be evolving. Importantly, this does not imply that central banks cannot achieve their 2 percent objectives, particularly since the pre-pandemic relationship was associated with inflation that tended to run below target. Different empirical approaches to measuring inflation breadth could also lead to different conclusions.

5. Decomposing diffusion indexes by major subcomponents

While aggregate diffusion indexes indicate that inflation remains broad-based, Figure 5 shows that the composition of these pressures differs across sectors. Decomposing core CPI into goods, housing services, and non-housing services reveals that the most widespread price increases are concentrated in non-housing services across the United States, the euro area, Canada, and the United Kingdom. This pattern suggests that inflation pressures could reflect sustained wage growth, as wage growth is more germane to non-services inflation.

Housing services remain a key contributor in the United States and Canada, where owner-occupied housing has a larger weight, amplifying regional differences. Goods inflation is also more prevalent than before the pandemic-particularly in North America, where policy factors such as tariffs may contribute-but is more moderate elsewhere.

Overall, Figure 5 indicates that services now account for much of the elevated diffusion, with housing disproportionately affecting North America and goods pressures varying across regions.

6. Wage inflation is a potential factor behind higher price changes

Measuring the breadth of wage increases across the economy can shed light on potential inflation pressures. We also construct diffusion indexes for nominal wage growth in both goods and services sectors in the United States and Canada, using the same three thresholds: above 3 percent, between 0 and 3 percent, and below 0 percent. Figure 6 shows that a substantial share of industries are experiencing above-3-percent wage growth, with services particularly affected. This mirrors the pattern observed in CPI diffusion indexes: just as non-housing services account for a persistent and widespread share of above-target price increases, labor costs in service industries are rising broadly, suggesting a possible link between wage pressures and services inflation.

Figure 7 highlights that wage growth remains elevated relative to pre-pandemic norms in both the United States and Canada. Increases are widespread across industries, with a large share of sectors experiencing wage growth above 3 percent. This broad-based strength in wage growth may contribute to the persistence and breadth of price pressures documented in earlier sections.

Taken together, the diffusion indexes for both prices and wages suggest inflation is no longer just about temporary shocks to goods or housing. Instead, broad-based wage growth (particularly in services) contributes to persistent price pressures, signaling a possible evolution of the inflation process compared to pre-pandemic era.

Conclusion

Even as headline inflation returns to or nears central bank targets in advanced economies, according to the approach we have followed here, the composition of price pressures remains different from the pre-pandemic era. A larger share of CPI categories now experiences inflation above 3 percent, while deflation has become rarer. In some countries, the relationship between inflation and the breadth of price changes may have shifted, but more data will be needed to assess whether this shift represents a lasting change in the inflation process.

Appendix

Table 1A: Headline Inflation Regression Results

Table 2A: Multiple Regression Inflation Results