The effects of energy shocks on inflation vary surprisingly widely over time
In the euro area, movements in energy prices have at different points in time had different effects on core inflation. These effects emerge with a lag, because it takes time for energy prices to pass through to other prices. Inflation expectations in the euro area are currently stable. This moderates the impact of energy shocks on core inflation.
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Recent supply disruptions in the energy market have affected euro area inflation expectations
Energy prices have had a significant impact on inflation in the euro area since the pandemic. The oil supply disruptions caused by the war in Iran have affected inflation expectations, but the effect has been moderate despite the oil production and supply shocks being considerable.
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Why central banks cannot always “look through” supply shocks
When inflation rises into the 5-6% range, firms may reprice more frequently just as households begin revising expectations more aggressively. These channels can reinforce one another, making early and credible policy action more valuable.
