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Oil, Gas, Pandemics, and War: The Drivers of Inflation

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  • Corrado, L.
  • Grassi, S.
  • Paolillo, A.
  • Ravazzolo, F.

Abstract

We study how the COVID-19 pandemic and Russia’s invasion of Ukraine reshaped energy prices and macroeconomic conditions in the Euro area. We develop and estimate a two-sector model in which oil, coal, and gas are combined to produce refined energy used by households and firms. The model allows for complementarities between energy and non-energy inputs, so shocks to individual energy markets propagate broadly through production, consumption, and inflation. Focusing on shocks specific to oil, coal, and gas from the onset of the pandemic to 2022:Q3, we find that they raised energy inflation by about 36 percentage points and headline inflation by 1.8 percentage points. Complementarities, wage indexation, and monetary policy amplify these effects, while subsidies offset them only partially.

Suggested Citation

  • Corrado, L. & Grassi, S. & Paolillo, A. & Ravazzolo, F., 2026. "Oil, Gas, Pandemics, and War: The Drivers of Inflation," Cambridge Working Papers in Economics 2629, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2629
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    2. Beatrice Pataracchia & Philipp Pfeiffer & Marco Ratto & Jan Teresiński, 2025. "Energy Commodity Price Shocks in the Euro Area Evidence from a Large-Scale Structural Model," European Economy - Discussion Papers 233, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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