Euro Area—Higher Energy Prices Undo Recent Inflation Progress

Research evidence excerpt

Euro Area—Higher Energy Prices Undo Recent Inflation Progress

Goldman Sachs European Economics Analyst

Exhibit 2: We Use a Bayesian Vector Auto-Regression to Jointly Model 19 Variables

Seasonally Last

Variable Unit Category

Adjusted Observation

World Oil Production Percent, mom No July Shock

Brent Oil Price Percent, mom No July Shock

TTF Natural Gas Price Percent, mom No July Shock

European Diesel Prices Percent, mom No July Shock

HICP Energy Percent, mom Yes June Direct

PPI Energy Percent, mom Yes May Direct

Farm Gate Prices Percent, mom No June Indirect

PPI Intermediate Percent, mom Yes May Indirect

PMI Composite Input Prices Level No June Indirect

12m Consumer Inflation Expectations Level No June Indirect

HICP NEIG Percent, mom Yes June Indirect

PMI Composite Output Prices Level No June Indirect

HICP Food Percent, mom No June Indirect

7q Mean Inflation Forecast Percent, yoy No Q2 Second-round

Negotiated Wages Percent, yoy No March Second-round

HICP Services Percent, mom Yes June Second-round

PMI Composite Output Index No June Control

Unemployment Gap Percentage Points No May Control

Global Supply Chain Pressure Index Index No June Control

Source: Goldman Sachs Global Investment Research

We can visualise our model with a heatmap (similar to the one ECB Chief Economist Lane

presented in a recent speech) showing the average strength and delay with which price

indicators have historically responded to oil supply, gas price, and diesel price shocks

(Exhibit 3). The variables are ordered from most upstream at the top to most

downstream at the bottom; the time elapsed since the shock increases from left to right;

and the colour gradient indicates the strength of the response.

Our estimates confirm that energy shocks have instantaneous and direct effects on