Inflation dynamics in western countries analysis of effects of covid 19 and the russian ukraine war

Abstract

This study aims to investigate the determinants of inflation in Western countries specifically focusing on the impact of covid-19 pandemic and the Russian -Ukraine war. To do this an economic analysis is done on a panel of 9 western countries over the period of 2020-2024 with data in trimester. We use secondary data from Organization for Economic Cooperation and Development (OECD) and the chosen variables based on existing literature are; short-term interest rates, exchange rates, consumer prix index of energy, production and global gross domestic product which are the independent variables used to explain the dependent variable inflation. The variables undergo a stationarity test and the integration test before being estimated by the GMM panel dynamic model. The results emphasize on the importance of lowering interest rates to reduce inflationary pressures which play a significant role stabilizing the economy in western countries. Consumer prix index of energy and gross domestic product also influenced positively and significantly the surge of inflation during the Covid 19 and the Russian-Ukraine war. Production and exchange rates were found to negatively affect inflation though non-significant during this period. In order to reduce inflationary pressures its recommended that the Central bank appreciate the national currency and to boost production to maintain economic stability