Europe’s Shockflation: The Price of Dependency

Executive Summary

Europe’s inflation was driven by cost shocks, not overheating demand. Using inter-country input-output data, this study shows that Europe’s 2021-23 inflation surge stemmed mainly from imported cost shocks — energy, inputs, and logistics — rather than domestic demand. Sectoral dependencies amplified these shocks along value chains, revealing how Europe’s production model transmits external pressures into broad price rises.

Structural asymmetries magnify inflation in the periphery. Southern and Eastern economies, with narrower industrial bases and higher import dependence, proved more vulnerable to “shockflation” than the core. Price shocks in core sectors (especially energy and trade) have far greater spillover effects on the periphery than the reverse — confirming a persistent core-periphery asymmetry within the single market.

External dependencies make inflation systemic. All EU regions show strong exposure to non-EU price shocks, particularly from Russia (energy) and China (industrial inputs). These external linkages transform temporary disruptions into lasting cost pressures, limiting the effectiveness of monetary tightening and highlighting the need for industrial diversification and resilience.

Tackling shockflation requires supply-side resilience, not just rate hikes. Monetary tightening cannot undo imported inflation. Reducing exposure to concentrated suppliers, boosting domestic production of key inputs, and aligning industrial policy with energy security are essential to stabilise prices. A resilience-oriented policy mix — industrial, trade, and investment — must complement macro stabilisation to prevent future cost spirals.

Policy recommendations

1. Map inflation exposure at sector-region level using input-output data to identify systemically significant industries.

2. Target industrial policy toward critical inputs with high supplier concentration and import reliance.

3. Diversify external sourcing away from single-country dependencies, particularly Russia and China.

4. Pair macro stabilisation with supply-side policies — investing in energy efficiency, logistics, and domestic capacity to dampen cost pass-through.