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Estimating the rise in expected inflation from higher energy prices

Author

Listed:
  • Paula Patzelt

    (London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

  • Ricardo Reis

    (London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

Abstract

When the price of electricity increases by 1%, households’ average expected inflation increases by 1.0 to 1.3 basis points. But, if those expectations have become unanchored, as happened between the start of 2021 and 2023, then the effect is higher by 0.2 to 1.6 basis points. This paper arrives at these estimates by exploiting variation both in the time series, and especially in the cross section, from newly-available public data on expected inflation by Euro area households across region, gender, education, and income, and on the cost of energy across region and source. The impact of exogenous shocks to energy prices on expected inflation increases for 8 to 12 months, but they can only account for a small share of the rise in expected inflation in 2021-23.

Suggested Citation

  • Paula Patzelt & Ricardo Reis, 2024. "Estimating the rise in expected inflation from higher energy prices," Discussion Papers 2411, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2411
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    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2024/CFMDP2024-11-Paper.pdf
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    More about this item

    Keywords

    Great Inflation; Monetary policy; Inattention;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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