Energy Prices Impact on Inflationary Spiral

Ondřej Bednář, Andrea Čečrdlová, Božena Kadeřábková and Pavel Řežábek
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Ondřej Bednář: Faculty of Economics, Prague University of Economics and Business, nám. W. Churchilla 1938/4, 130 67 Prague, Czech Republic
Andrea Čečrdlová: Faculty of Economics, Prague University of Economics and Business, nám. W. Churchilla 1938/4, 130 67 Prague, Czech Republic
Božena Kadeřábková: Faculty of Economics, Prague University of Economics and Business, nám. W. Churchilla 1938/4, 130 67 Prague, Czech Republic
Pavel Řežábek: Faculty of Economics, Prague University of Economics and Business, nám. W. Churchilla 1938/4, 130 67 Prague, Czech Republic

Energies, 2022, vol. 15, issue 9, 1-25

Abstract: Energy constitutes an essential share of costs across any economy. The percentage of electricity in the overall energy consumption is steadily increasing. This increase, however, is not reflected correctly in the consumption basket relevant for measuring inflation and, therefore, for monetary policy formulation. We argue that the energy mix reflected in inflation should be revised in favour of electricity. We present an analysis of inflationary pressures across Europe and decompose the impact of energy categories on headline inflation. Building on the inflation expectations framework, this study examines the characteristics and magnitude of the current energy price dynamics and quantifies its share in the countries’ effective inflation. Our research also confirms a compelling insight into the country’s energy structure and inflationary pressures when a larger share of renewable electricity sources proves to be associated with lower inflation. Finally, we argue that the energy price shock cannot be viewed as a one-shot event as in the case of oil price shocks in the past. We draw recommendations for monetary policy formulation. The implication of renewable sources on inflation should be of interest to policymakers, especially in times of high, almost galloping inflation rates in some European countries, unstable fossil energy sources supply due to geopolitical instability, and climate crisis.

Keywords: energy prices; electricity; inflation; expectations; monetary policy (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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