Gas supply shocks, uncertainty and price setting: evidence from Italian firms

This paper examines how natural gas supply shocks affect Italian firms' pricing decisions and inflation expectations using quarterly survey data from the Bank of Italy's Survey on Inflation and Growth Expectations (SIGE). We identify natural gas supply shocks through an external IV-VAR approach exploiting likely unexpected news about interruption to gas supplies to Europe. Our findings show that although gas supply shocks do not have huge effects on gas quantity and only modest effect on gas inventories, they are quickly transmitted to spot electricity prices with persistent effects. We then estimate a proxy internalizing BVAR incorporating firm-level variables from SIGE, documenting that gas supply shocks raise firms' current and expected prices as well as inflation uncertainty. Finally, we uncover substantial nonlinearities using state-dependent local projections: under high inflation uncertainty, firms successfully pass cost increases on to consumers, sustaining elevated prices; under low uncertainty, recessionary effects dominate, leading firms to cut prices below baseline.