Does energy transition affect domestic inflation?

Global prices, such as oil and commodities, are known to influence domestic inflation. But what about energy transition prices? With the ongoing global shift towards energy transition, the inputs required for this process - especially critical minerals - could potentially drive up prices. We explore this hypothesis by analyzing the impact of energy transition costs on both domestic inflation and global prices using a GVAR model spanning from July 2012 to April 2024 across 39 countries. Our findings reveal that energy transition prices affect global prices (oil, commodities, and metals) as well as domestic prices, demonstrating significant spillover effects. Thus, energy transition shocks contribute to global inflation. The variance decomposition analysis shows that energy transition costs explain a substantial portion of domestic inflation, followed by commodity and metal prices. Our estimates underscore the interconnectedness of energy transition, commodity, and metal prices. We further validate these results by testing disaggregated energy transition costs, focusing on four critical minerals (nickel, cobalt, lithium, and rare earth). We show that shocks affecting these minerals also impact global inflation. Additional tests, including shock identification, financial integration analysis, exclusion of the Covid-19 period, and incorporation of other global variables, consistently support our findings. In conclusion, we discuss policy implications for central banks in managing global inflation driven by the energy transition.