ECB economists analyze energy supply shocks, their economic impacts, and implications for monetary policy, focusing on global versus regional shocks and second-round effects.
Philip R. Lane, Member of the ECB Executive Board, discussed analysis of energy supply shocks at the Centre for European Reform. The analysis includes the impact of oil price shocks on the euro area economy, using a Bayesian VAR model that incorporates geopolitical supply shocks, oil prices, economic activity, and interest rates.
Following a geopolitical oil supply shock raising real oil prices by 10%, euro area real GDP growth is estimated to decrease by 0.2 to 0.3 percentage points annually for three years. Private consumption and investment are also negatively affected, with investment more sensitive to increased uncertainty. The effects may have weakened over time, especially since 2003, due to declining energy intensity.
Energy market disruptions are more global now compared to the 2022 Russia-Ukraine conflict. A multi-region DSGE model shows that global shocks lead to larger increases in import prices, deterioration in terms of trade, and more severe impacts on output and inflation than regional shocks. Global shocks also cause more pronounced indirect effects on consumer prices, including non-energy goods and services, with larger contributions from imported inflation.
Energy price shocks generate immediate direct effects on consumer prices and gradual indirect effects through higher input costs, which can lead to persistent inflation via second-round effects such as wage-setting and inflation expectations. Indicators show that recent shocks are unfolding in a less demand-supportive environment than in 2022, with supply factors playing a more prominent role.
Monitoring early indicators like wage agreements, food prices, and firm expectations is crucial. The current situation suggests contained inflation impacts so far, but uncertainties remain, requiring scenario analysis in the ECB’s macroeconomic projections.
ECB emphasizes that monetary policy responses should consider the different characteristics of supply shocks. While demand destruction channels may limit inflation pressures, factors such as cost-of-living effects, real interest rate dynamics, expectations, and communication risks justify active policy measures. Policy decisions should be data-dependent and made on a meeting-by-meeting basis, with no pre-commitment to specific rate paths.
