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Electricity Price and Inflation: Macroeconomic Implications of Real-Time Pricing

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  • Antonio J. Garzon
  • Luis A. Hierro

Abstract

Electricity prices can be an important driver of inflation. However, the transmission from wholesale electricity price to inflation depends on the type of pricing mechanism in the retail market. Using the introduction of Real-Time Pricing (RTP) in the Spanish retail electricity market, we analyze the transmission of wholesale electricity price shocks to inflation dynamics and how this transmission is affected by the introduction of RTP. The main findings are that—after RTP was rolled out—electricity price shocks display a swifter transmission to inflation while the maximum impact is around three times higher than in the previous period. This higher transmission is not only generated by a more pronounced reaction of the retail electricity price but is also caused by a greater transmission of these shocks to core inflation. These results imply that introducing RTP impacts inflation dynamics and, therefore, affects how central banks should react to this type of shock. JEL Classification: E31, Q43, Q48

Suggested Citation

  • Antonio J. Garzon & Luis A. Hierro, 2024. "Electricity Price and Inflation: Macroeconomic Implications of Real-Time Pricing," The Energy Journal, , vol. 45(4), pages 195-222, July.
    • Handle: RePEc:sae:enejou:v:45:y:2024:i:4:p:195-222
    DOI: 10.1177/01956574241284429
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    More about this item

    Keywords

    electricity price; real-time pricing; inflation dynamics; pass-through;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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