How does inflation propagate among CPI components? Evidence from the euro area

Abstract

This study employs a time-varying parameter vector autoregressive (TVP-VAR) model to investigate inflation propagation and spillovers among twelve major Consumer Price Index (CPI) components across eleven euro area countries from 1999 to 2023. We uncover empirical regularities in the transmission channels of inflation, noting Transport and Clothing and Footwear as primary shock transmitters, whereas Communication, Alcohol and Tobacco consistently absorb shocks. These insights, consistent across various contexts and countries, contribute to understanding inflation persistence and households’ inflation experiences in the Euro area.