The European Central Bank has published a working paper by Alfonso Merendino and Tommaso Monacelli finding that the pass-through of energy prices to inflation is stronger and more persistent when supply chain uncertainty is elevated. Using U.S. and euro area evidence, the authors argue that firms treat energy prices not only as a direct cost shock but also as a signal of broader logistical disruption, which can cause even transitory energy shocks to feed more forcefully into consumer prices and inflation expectations. The paper states that the views expressed are those of the authors and do not necessarily reflect those of the ECB. The empirical analysis shows materially larger responses of headline and core inflation when region-specific supply chain uncertainty is in the top 20% of its distribution, with similar results across four supply chain uncertainty measures and after additional controls and placebo tests. A Kalman filter exercise suggests that, in high-uncertainty periods, energy prices become more informative about logistical conditions than transportation prices such as the Baltic Dry Index, while earnings-call text shows managers linking energy costs and supply bottlenecks more closely in those regimes. The result does not carry over to gas shocks in the euro area and is not replicated by broader uncertainty indicators such as the VIX or economic policy uncertainty. In the paper's New Keynesian model, this mechanism creates an endogenous uncertainty wedge in the Phillips Curve that amplifies and propagates inflation after energy shocks. The authors conclude that the conventional prescription to look through supply-driven energy shocks can break down when supply chain uncertainty is high, implying a state-contingent monetary policy response that conditions on upstream supply chain volatility as well as energy prices.
European Central Bank 2026-05-12
European Central Bank publishes research finding supply chain uncertainty amplifies energy shock pass through to inflation
The European Central Bank has published a working paper finding that the pass-through of energy prices to inflation is stronger and more persistent when supply chain uncertainty is elevated, as firms treat energy prices as both a cost shock and a signal of broader logistical disruption. Evidence for the United States and euro area shows larger responses of headline and core inflation when supply chain uncertainty is in the top 20% of its distribution. In a New Keynesian model, this creates an endogenous uncertainty wedge in the Phillips Curve, implying that the conventional prescription to look through supply-driven energy shocks may fail under high supply chain uncertainty and that monetary policy should condition on upstream supply chain volatility as well as energy prices.