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Inflation: Why so high, and what will drive it going forward?

Having risen strongly since the start of 2021, inflation in 2022 reached levels not seen since the 1980s. Now seemingly heading in the right direction at last, what caused the surge, and what will likely drive inflation going forward? Our chief economist, Las Olsen, has been in discussion with the head of economics and monetary policy at Danmarks Nationalbank.

Danmarks Nationalbank, the Danish central bank, recently published a paper exploring the forces behind the high level of inflation prevailing in the US, the euro area and Denmark since 2021.

Danske Bank’s chief economist, Las Olsen, has therefore invited the Danish central bank’s head of economics and monetary policy, Thomas Harr, to talk about inflation and what we can expect in the near future. You can watch them discuss inflation and its likely trajectory here:


The central bank’s research points to the Covid-19 pandemic, Russia’s invasion of Ukraine and the associated policy responses as having a particular impact on supply and demand, which in turn drove inflation higher.  

Covid-19 pandemic – demand outstrips
The pandemic initially triggered a sharp fall in economic activity due to the widespread lockdowns. However, as society reopened, economic activity picked up rapidly, with global demand overtaking supply. The imbalance in supply and demand was reinforced by persisting disruptions to key supply chains, which further compounded supply-side issues and thus created inflationary pressure.

Accommodative monetary and fiscal policies, which helped underpin the strong economic upswing, were the second contributory factor to rising inflation. For example, a series of compensation schemes were launched across the US and several European countries to provide relief from the pandemic and later the spike in energy prices, with Denmark, for example, paying out a hitherto frozen holiday allowance in 2021, which stimulated private consumption.  

Energy and raw materials prices soar
The third inflation trigger that Danmarks Nationalbank highlights in its analysis is the war in Ukraine.

Russia’s invasion of Ukraine sent shockwaves through global and European energy markets, where prices were already on the high side.

Add to this a lack of water in Nordic reservoirs, reduced capacity at French nuclear power plants and the closure of German nuclear plants, and you have a near perfect storm for the electricity market.

Soaring energy prices in 2021 and 2022 indirectly fuelled inflation by increasing production costs.

Inflation drivers

Covid-19 pandemic

Political reactions

War in Ukraine

What will drive inflation going forward?
In its analysis, Danmarks Nationalbank also lists three factors it expects will influence whether inflation rises or falls in the coming years.

The first relates to energy price stability, with the central bank expecting lower energy prices ahead due to reduced consumption and improved security of supply in Europe.

Second, overall demand and purchasing power look set to decline on the back of higher interest rates, in the central bank’s view.

Finally, Danmarks Nationalbank expects the risk of supply chain disruption to decrease after, for example, China abandoned its zero-tolerance policy to Covid-19.

However, while supply chain challenges are not on the cards, the report notes the lingering risk that the pandemic, Russia’s attack on Ukraine and US-China rivalries could prompt an increasing number of global companies to establish more regional value chains, which could reduce efficiency, raise costs, hamper production and thus increase inflationary pressures.

More insights from our experts

If you want to know more about the economies and financial markets, a large part of Danske Research's analyzes are freely available.