Natural gas prices, inflation expectations, and the pass-through to euro area inflation

This paper examines the recent increase in natural gas prices, the sensitivity of inflation expectations, and the pass-through to inflation. Using a semi-structural vector autoregression, we identify a natural gas price shock in the euro area with a combination of sign and zero restrictions. We rely on market-based measures of inflation expectations. The results show that shocks to the real price of natural gas affect both inflation and inflation expectations. To investigate the relative importance of the pass-through of inflation expectations to inflation, we conduct a structural scenario analysis in which inflation expectations are insensitive to movements in the real price of natural gas. The results indicate the presence of strong second-round effects via expectations. Our analysis provides guidance for policymakers to better understand the potential trade-offs of different policy responses to natural gas price shocks, particularly with respect to the potential for a de-anchoring of inflation expectations. • This paper investigates the surge in natural gas prices in 2021–22 in the euro area. • We identify a semi-structural gas price shock using sign and zero restrictions. • A positive gas price shock raises inflation expectations and inflation in the euro area. • Second-round effects are investigated through a counterfactual exercise. • We find similar but attenuated effects for oil prices.