The pass-through to inflation of gas price shocks

This paper analyses the pass-through of gas shocks to inflation in the euro area. First, it uses a Bayesian Structural Vector Autoregressive (BSVAR) framework to estimate the effects of gas supply shocks on headline inflation in the euro area and its four largest economies. A gas supply shock that increases gas prices by 10 % raises euro area headline inflation by 0.6 percentage points after one year. The transmission of gas supply shocks is driven by direct and indirect effects, i.e. by households consuming gas products and by second-round effects through production costs. We document cross-country heterogeneity arising from differences in reliance on energy commodities across consumption and production, as well as from variation in the regulation of retail energy prices. Second, we build a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model augmented with energy and show that indirect effects account for approximately 75 % of the cumulative response of headline inflation after three years.