Gas Price Shocks and the Inflation Surge

We identify a supply shock to the gas price in the Euro Area using market-relevant news and high-frequency data, as well as a demand shock leveraging exogenous variation induced in the price of gas by anomalous temperatures. These shocks have economically significant effects. Gas supply and demand shocks exert significant impacts on both headline (3% pass-through) and core inflation (1% pass-through). However, while gas supply shocks have a less pronounced overall effect, their effects are more persistent in some key sectors, such as energy, compared to demand shocks. We also document an important interdependence of the gas and oil markets, where shocks in gas and oil prices mutually influence both commodities. Crucially, gas price shocks have more persistent effects on macro variables with respect to the corresponding oil price shocks. Finally, we identify the corresponding gas price shocks in the US and show that their macroeconomic effects are less severe compared to those in the Euro Area. In the US natural gas quantities respond significantly, offsetting gas shocks within 9 months. We also provide comparable estimates of the pass-through of gas and oil price shocks in both regions.

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Suggested citation: Colombo D., & Toni F. (2024) “Gas Price Shocks and the Inflation Surge”