Determinants of Inflation in EU Member States: A Dynamic Analysis of Cost-Push and Demand-Pull Factors

Abstract

This study investigates the main determinants of inflation in EU member states from 2014 to 2024, focusing on both cost-push and demand-pull factors across new, old, and combined country groups.A dynamic panel model is estimated using the System Generalized Method of Moments (System GMM) to address endogeneity and capture inflation persistence. Key variables include lagged inflation, industrial production, money supply, unemployment, exchange rate, financial index, energy prices, consumer prices, and a structural break dummy. Findings reveal strong inflation persistence in all groups, with lagged inflation highly significant. Energy prices consistently have a positive and significant impact, especially in new member states. Financial factors affect inflation primarily in new countries, while exchange rate impacts are significant only in old countries. Unemployment exerts a weak negative effect. To stabilize inflation, policymakers should focus on managing inflation expectations and carefully monitoring energy price fluctuations, particularly in emerging EU economies.