Energy prices, supply chain uncertainty, and the amplified pass-through to inflation
Why did the 2021–2023 inflation response to energy price shocks prove so unusually strong and persistent, even though prior decades of similarly large energy fluctuations had left inflation largely unmoved? This is the question, Alfonso Merendino and Tommaso Monacelli analyze in this paper.
The authors develop a model where firms use two production inputs, a liquid, globally traded energy input and a specialized component e.g. microchips. Both are routed through shared, capacity-constrained logistics networks. Unable to distinguish a transitory energy price shock from a persistent logistical disruption, firms apply Bayesian learning to infer latent delay costs from observed energy prices. This inference problem generates an incomplete-information New Keynesian Phillips Curve with an endogenous cost-push term that is activated by energy price movements and amplified by the volatility, not the level, of transportation shocks.
The empirical analysis draws on monthly data for the US and Euro Area spanning January 2002 to December 2024. The key series are: headline CPI/HICP inflation and energy price inflation (retrieved from FRED and Eurostat); the unemployment rate and one-year-ahead inflation expectations (Michigan Survey for the US; Eurostat for the EA); and the Global Supply Chain Pressure Index (GSCPI, published monthly by the New York Fed) as the baseline measure of supply chain uncertainty, complemented by the text-mining based Energy Transportation Uncertainty (ETU) index.
Findings
- State-dependent pass-through: The pass-through of energy prices to headline and core CPI inflation is significantly larger when supply chain uncertainty is high. This holds for both the US and Euro Area and across both uncertainty proxies.
- Volatility, not level, is the amplifier: The paper’s central theoretical result is that it is the volatility of transportation shocks — not their level — that drives the amplification of energy pass-through. Higher volatility increases firms’ uncertainty about unobserved delay costs, causing them to assign greater weight to energy prices as supply chain signals. Even a purely transitory raw energy shock therefore triggers forward-looking price adjustments, as firms pre-emptively raise prices in anticipation of persistent input delivery problems.
Supply Chain Uncertainty, Energy Prices, and Inflation
Authors: Alfonso Merendino, Tommaso Monacelli
From: ECB, Bocconi University
How production linkages amplify and propagate energy price shocks
How do international production networks shape the transmission of foreign energy price shocks to domestic inflation — and what does this imply for monetary policy in the Euro Area? This is the question Pablo Aguilar, Rubén Domínguez-Díaz, José-Elías Gallegos, and Javier Quintana analyze in this paper.
The authors develop a multi-country, multi-sector open-economy New Keynesian model calibrated to 6 regions (Germany, France, Italy, Spain, the rest of the Euro Area, and the rest of the world) with 44 production sectors each. Firms produce using labor and intermediate goods sourced domestically and abroad, creating fully fledged national and international input-output (IO) linkages. Nominal rigidities are introduced via Calvo staggered price-setting, with sector- and country-specific adjustment probabilities calibrated using ECB micro-level CPI data, and trade flows matched to OECD Inter-Country Input-Output tables.
Findings
- IO linkages amplify cumulative inflation by up to 60%. On impact, headline inflation rises similarly with and without production networks, as the initial spike is driven directly by the surge in energy prices. However, IO linkages are crucial beyond impact as they trigger a feedback loop between rising selling prices and rising production costs that persists well beyond the initial shock.
- National and international networks have a super-additive joint effect. The contribution of the joint national and international IO structure exceeds the sum of their individual contributions. Higher domestic inflation raises export prices, which in turn raises import prices abroad, amplifying domestic inflation further. This is a cross-border feedback that neither dimension alone can generate.
- Country heterogeneity: persistence vs. spike. Germany and Spain exhibit starkly different inflation dynamics after the same shock. Spain, with a higher energy share in household consumption, experiences a sharp initial spike; Germany, with larger and more complex IO networks and stickier prices (average price duration 4.50 quarters vs. 4.18 in Spain), experiences more modest but far more persistent inflation. Over time, cumulative inflation in Germany surpasses that in Spain.
- Production networks break the “Divine Coincidence”. In a standard one-sector open-economy model, stabilizing inflation simultaneously closes the output gap. With multi-sector IO linkages, this no longer holds: a central bank targeting zero inflation must engineer a substantially larger output contraction. The trade-off is roughly four times larger in the baseline multi-sector model than in the one-sector equivalent, and worsens further when the international IO dimension is included.
The Transmission of Foreign Shocks in a Networked Economy
Authors: Pablo Aguilar, Rubén Domínguez-Díaz, José-Elías Gallegos, Javier Quintana
From: European Central Bank, Banco de España
