Economic Memos provide insight into the analysis work being performed by Danmarks Nationalbank’s employees. For example, Economic Memos contain background analyses and method descriptions. Economic Memos are primarily targeted at people who already have a knowledge of economic and financial analyses.
Increases in energy prices could have a stronger effect on consumer prices than decreases
Going forward, Europe risks more volatile energy prices due to geoeconomic fragmentation, climate change and the transition to renewable energy sources. This economic memo explores the pass-through from changes in energy prices to consumer prices in Denmark and the euro area. The results indicate that increases in the price of natural gas or crude oil have a greater effect on consumer prices than decreases. Awareness of this asymmetry is important for central banks in safeguarding price stability.
Key messages
Why is this important?
Central banks are charged with ensuring price stability amid the risk of rising energy price volatility. Therefore, it is important for central banks to understand the propagation of shocks to energy prices onto consumer prices. If energy price volatility puts upward pressure on inflation in the future, this will require central banks to tighten monetary policy in order to preserve price stability.
Main chart
Energy price shocks affect consumer prices asymmetrically, with stronger pass-through of positive shocks
Note:
The chart shows impulse responses in per cent to positive and negative gas price shocks on the Danish HICP. The negative shock is inverted for comparability reasons. Standard errors are calculated using Newey–West standard errors. Gas price shocks are estimated using an ARIMA model.
Source:
Own calculations.
"Increasing physical and transition risks from climate change are also likely to amplify short-term fluctuations in inflation"
Gita Gopinath,
Første viceadministrerende direktør, Den Internationale Valutafond