Global Inflationary Pressures and Monetary Policy Response: Can Central Banks Tame the 21st Century Inflation?

This study examines the main drivers of inflation in 27 European Union (EU) countries over the period 2005–2023, focusing on geopolitical tensions, energy prices (EPs) and central bank monetary policy responses. Using panel data econometric methods, four models were applied: Ordinary Least Squares (OLS), OLS Robust (OLSR), Fixed Effects (FE) and Random Effects (RE). Based on the results of the Hausman test, the RE model was selected as the most appropriate. The main variables include inflation (INF), real interest rates (IR), Geopolitical Risk Index (GRI) and EPs. The findings show that geopolitical tensions (GRI) are positively and significantly associated with inflation ([Formula: see text], [Formula: see text]), indicating their essential role in driving price levels. While IR shows a significant negative relationship with inflation ([Formula: see text]0.076, [Formula: see text]), EPs show an insignificant effect. Monetary policy independence (MPI) contributes to controlling inflation, while fiscal variables do not have a significant impact. The model explains 69.1% of the variation in inflation. This study fills a critical gap in the literature by integrating geopolitical risks and MPI into inflation models, extending prior work that often isolates energy or demand-driven factors. Our findings suggest that central banks can effectively mitigate 21st-century inflation through strategic interest rate adjustments and autonomy, offering policymakers insights into balancing price stability with global shocks, particularly in peripheral EU economies vulnerable to geopolitical disruptions. Theoretically, this study advances inflation literature by integrating geopolitical risks and MPI, extending prior models focused on energy or demand-driven factors. Practically, it offers policymakers actionable insights, highlighting the efficacy of autonomous monetary policy and strategic interest rate adjustments in mitigating inflation, particularly in peripheral EU economies vulnerable to global shocks. The study does not address income equality or consumer confidence, focusing instead on macroeconomic and geopolitical determinants of inflation.