Assessing the pass-through of energy prices to inflation in the euro area

This paper focuses on the developments of energy prices since mid-2021 and assesses their impact on euro-area headline inflation, also considering the indirect transmission through the core and food components. We find that, while the contribution of energy inflation to core and food inflation is generally low in normal times, it has been significant in the recent period, as a consequence of the exceptional increase in energy prices. In the first nine months of 2022, energy inflation accounted for more than 60 per cent, on average, of headline inflation in the euro area, either directly or indirectly. The same result holds qualitatively true for the four largest countries in the euro area, although with some quantitative differences. These findings provide relevant indications for setting the normalization path of monetary policy in the euro area. Given the prevailing role of energy prices – an exogenous supply factor that can hardly be affected directly by policy rate increases – in driving inflation, the appropriate speed of adjustment largely depends on the assessment of the risks of second-round effects and of a de-anchoring of long-term inflation expectations.