The European Central Bank has published a Working Paper examining how different natural gas market shocks feed through to euro area inflation expectations and realised inflation. Using a weekly Bayesian vector autoregressive model over 2018 to 2024, the authors find that pipeline supply shocks, precautionary demand shocks linked to fears of shortages, and industrial demand shocks were the main drivers of market-based headline and core inflation expectations. By contrast, liquefied natural gas supply shocks had a more limited role in shaping inflation expectations even though they moved gas prices and realised inflation. The paper distinguishes five types of shocks in the European gas market: pipeline supply, global LNG supply, industrial demand, weather-related demand and precautionary demand. It finds that precautionary demand played a larger role in the 2021 to 2023 energy crisis than earlier work had suggested, with the Russian invasion of Ukraine identified primarily as a precautionary demand shock rather than an immediate physical supply disruption. Pipeline and LNG supply shocks produced broadly similar effects on gas prices, inventories and realised inflation, implying that euro area gas market developments need to be assessed in a global framework, but LNG shocks were less reflected in inflation-linked swap pricing, pointing to a disconnect between observed inflation dynamics and investor perceptions. Weather-related shocks mattered in specific episodes but had limited effects on inflation expectations. The paper notes that the views expressed are those of the authors and do not necessarily reflect those of the ECB. The study also reports robustness checks using alternative identification strategies, lag lengths, pre-crisis samples and survey-based inflation expectations, with broadly similar conclusions. It is described as forthcoming in a Journal of Macroeconomics special issue.
European Central Bank 2026-05-07
European Central Bank research finds precautionary gas demand and pipeline shocks drove euro area inflation expectations while LNG shocks mainly affected realised inflation
The European Central Bank has published a Working Paper analysing how different natural gas market shocks transmit to euro area inflation expectations and realised inflation using a weekly Bayesian vector autoregressive model for 2018–2024. It finds that pipeline supply and industrial demand shocks were the main drivers of market-based headline and core inflation expectations, while liquefied natural gas supply shocks, despite affecting gas prices and realised inflation, were less reflected in inflation-linked swap pricing. The paper concludes that precautionary demand played a larger role in the 2021–2023 energy crisis than previously thought and that euro area gas market developments need to be assessed in a global framework.