How and why the high energy price has caused inflation to explode in Europe. Bank of Italy report
What the Bank of Italy 's assessments say about the impact of the rise in energy prices on inflation in the euro area
(Excerpt from the 2022 annual report of the Bank of Italy)
Since mid-2021, energy prices have risen sharply, first reflecting the recovery in global economic activity after the pandemic and subsequently the increases, especially for natural gas, following the intensification of geopolitical tensions and the conflict in Ukraine.
FROM ENERGY MARKETS TO THE PRICE CHAIN
The pressures originating in the wholesale energy markets in the euro area have gradually been transmitted along the price formation chain, influencing the price lists of other goods (such as food and non-food products derived from industrial processing) and of many services, in particular those relating to transport, tourism and catering.
THE IMPACT OF ENERGY EXPENSES ON INFLATION IN EUROPE
An econometric analysis of the impact of rising energy prices on inflation in the euro area shows that:
- the energy shock would have contributed about one percentage point to the trend in core inflation on average in 2022
- (b) on the other hand, about 60 per cent of overall inflation is believed to be attributable to increases in energy prices. The estimates for Germany, Italy and Spain are of a similar magnitude to those
relating to the euro area as a whole; in France, where energy price increases were less pronounced thanks to extensive fiscal measures to sterilize price increases, the effects were more limited.
AN IMPACT HIGHER THAN THE EVALUATIONS?
These assessments assume that the increases in energy prices have been transmitted to the prices of other goods and services in ways similar to the empirical regularities found in the past. However, it cannot be excluded that the exceptional nature of the shock has led to changes in its transmission and, in particular, in the setting of prices by firms.
Further econometric estimates suggest that the responsiveness of underlying inflation to energy prices has roughly doubled compared to historical averages in more recent periods.
Taking these considerations into account, the overall effect of energy price hikes on underlying inflation in 2022 may have been larger than the estimates shown in the chart.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/rialzo-prezzi-energia-inflazione-banca-italia/ on Sun, 04 Jun 2023 05:31:13 +0000.