Supply Chain Uncertainty, Energy Prices and Inflation

Using U.S. and EA data, we document that (i) the pass-through of energy prices to inflation is state-dependent — stronger when supply chain uncertainty is elevated — and (ii) in such states, energy prices become more informative about broader supply chain conditions. We develop a theory in which firms use two inputs — energy and a specialized component — both shipped through a capacity-constrained network. Under congestion, energy can still be sourced in local liquid markets at a premium, while the specialized input faces stochastic transportation shocks. Because energy is a liquid, globally traded input whose price reflects congestion, firms treat it as a noisy signal of unobserved delays and update their beliefs via Bayesian learning. This belief channel raises perceived marginal costs and generates an uncertainty-driven component of marginal cost that amplifies and propagates energy shocks. Both the static and the dynamic pass-through from energy prices to output prices scale with supply chain uncertainty. Embedding this mechanism in a New Keynesian model, we show that higher supply chain uncertainty increases the sensitivity and persistence of inflation to transitory energy shocks, and relate these findings to the 2021–23 inflation episode. Our findings call for a reconsideration of the so-called "look-through" approach of monetary policy to supply shocks.