Oil, Gas, Pandemics, and War: The Drivers of Inflation

We study how the COVID-19 pandemic and Russia’s invasion of Ukraine reshaped energy prices and macroeconomic conditions in the Euro area. We develop and estimate a two-sector model in which oil, coal, and gas are combined to produce refined energy used by households and firms. The model allows for complementarities between energy and non-energy inputs, so shocks to individual energy markets propagate broadly through production, consumption, and inflation. Focusing on shocks specific to oil, coal, and gas from the onset of the pandemic to 2022:Q3, we find that they raised energy inflation by about 36 percentage points and headline inflation by 1.8 percentage points. Complementarities, wage indexation, and monetary policy amplify these effects, while subsidies offset them only partially.