Pandemic-Era Inflation Traced to Energy Dependence, Not Policy or Price Feedback Loops

In a pivotal study released by the International Monetary Fund’s Research Department, economists Jorge Alvarez and Thomas Kroen take a deep dive into the role of energy prices in fueling the global inflation surge during the COVID-19 pandemic. Their paper, “The Energy Origins of the Global Inflation Surge,” stands out for its innovative use of a sector-level, cross-country dataset covering over 30 economies and applying rigorous local projection methods. Drawing data from the IMF's World Economic Outlook, OECD databases, Eurostat, Haver Analytics, and empirical modeling inputs from the Bank for International Settlements and European Central Bank, the authors provide new clarity on how inflation behaved in the face of one of the largest global energy shocks in decades.

Unprecedented Shocks, Predictable Pass-through

The 2021–2022 period witnessed a historic explosion in energy prices. Oil, gas, and coal soared, with European gas prices surging up to 180 percent, largely driven by supply chain disruptions and geopolitical tensions, particularly Russia’s invasion of Ukraine. Yet despite the scale of these shocks, the study finds that inflation’s response was surprisingly stable. Contrary to predictions that such dramatic price shifts might fundamentally change inflation dynamics, perhaps by triggering wage-price spirals or supercharging consumer expectations, Alvarez and Kroen show that inflation pass-through from energy shocks remained consistent with historical patterns. Using CPI and producer price index data, they estimate that a 1 percentage point increase in energy inflation typically raised consumer prices by about 0.05–0.07 percentage points over 18 months, figures nearly identical to those observed in prior episodes.

To ensure the reliability of these findings, the researchers employ an instrumental variable strategy using oil supply news shocks developed by Känzig (2021), effectively isolating exogenous movements in energy prices. The results hold steady whether examining advanced economies or emerging markets, suggesting a broad structural rigidity in the way energy prices influence overall inflation. This is a crucial insight: despite the global turbulence, the machinery of inflation appeared to function just as it had in less dramatic times.

Non-linear, But Not New

While the passthrough rate remained stable, the study also probes deeper into whether the relationship between energy price changes and inflation was non-linear, that is, whether larger energy shocks produced disproportionately greater inflation. The findings affirm the presence of non-linearities, especially in advanced economies. When energy inflation was low (around 1 percent), its marginal impact on consumer inflation was modest. But at higher levels of energy inflation, such as the 20 percent spikes seen during the pandemic, the inflationary impact doubled.

What is perhaps more intriguing is that these non-linearities were not unique to the COVID period. They had been present before, and there is no evidence that they intensified in the post-2020 landscape. This suggests that firms respond to large shocks more aggressively, possibly because price adjustments are costly and only triggered when economic pressures breach a certain threshold. But again, this behavior is structurally consistent with the past. The implication: the size of the energy shock mattered greatly, but the system’s response to it remained strikingly predictable.

Energy-Intensive Sectors Drove the Early Inflation Surge

Where the study truly innovates is in its focus on the sectoral dimension of inflation. Instead of relying solely on national averages, Alvarez and Kroen examine how different sectors within economies responded to energy price increases. They uncover a telling pattern: energy-intensive sectors like manufacturing, agriculture, and construction experienced early and steep inflation hikes, closely tracking the trajectory of rising input costs. Less energy-dependent sectors, such as finance or professional services, exhibited a more delayed but prolonged inflationary trend.

This pattern is strongly tied to two structural characteristics, energy input reliance and price flexibility. By leveraging international input-output tables from the OECD and pricing rigidity measures from Rubbo (2023), the authors are able to show that these two variables significantly shape the inflation path of each sector. For example, a sector that was one standard deviation more energy dependent than the average experienced up to 0.96 percentage points more inflation at the peak of the energy shock. Sectors with more flexible pricing mechanisms saw an even larger difference, up to 3.4 percentage points more inflation during the most volatile quarters.

Structural Rigidities Matter More Than Pandemic Anomalies

A major takeaway from the paper is that the inflation seen during the pandemic was less the result of unique, crisis-era dynamics and more a reflection of how economies have long been structured. Even with dramatic government interventions, stimulus packages, energy subsidies, and monetary easing, the underlying mechanisms of inflation transmission held firm. The study finds no support for runaway wage-price spirals, and even in the face of enormous fiscal action, the inflation pass-through remained grounded in energy dependence and pricing behaviors at the sector level.

By conducting robustness checks, instrumental variable analyses, and event studies, the authors confirm their results across methodologies. Whether inflation was measured by CPI, PPI, or sectoral deflators, the findings pointed in the same direction: inflation surged because energy prices surged, but the pathways through which this happened were well-established and structurally persistent.

A New Template for Inflation Monitoring

Alvarez and Kroen’s research ultimately calls for a rethinking of how we monitor and predict inflation. Traditional aggregate indicators may miss crucial sectoral signals, especially in economies where energy plays a vital role across supply chains. The study shows that understanding inflationary pressures requires close attention to sectoral heterogeneity, how different industries consume energy, and how quickly they adjust their prices. This kind of granularity can help central banks and policymakers make more targeted decisions, distinguishing between transitory and structural inflation.

In essence, this paper provides not just a historical account of the COVID-era inflation surge but a roadmap for future macroeconomic analysis. By recognizing the enduring importance of energy dependence and pricing behavior, it equips economists and decision-makers with the tools to interpret inflation data with sharper precision and greater foresight.