How Energy Price Shocks Drove Inflation Without Changing the Passthrough Mechanism

The IMF Working Paper by Jorge Alvarez and Thomas Kroen, published in July 2025, offers a sweeping investigation into how energy price shocks contributed to the global inflationary wave during the COVID-19 pandemic. Conducted under the IMF Research Department and drawing on extensive support from institutions such as the OECD, Haver Analytics, Eurostat, and the US Bureau of Economic Analysis, the paper deploys a detailed cross-country, sector-level dataset covering over 30 economies. It goes beyond conventional macroeconomic narratives by unpacking how structural sectoral characteristics, particularly energy dependence and pricing flexibility, mediated the inflationary impact of energy shocks. The findings present both timely insights and a long-term framework for policymakers navigating inflation in a volatile energy landscape.

A Global Shock with Historic Intensity

Between 2021 and 2022, global energy markets witnessed dramatic upheavals. The war in Ukraine, ongoing pandemic-related disruptions, and supply bottlenecks sent prices of coal, oil, and gas skyrocketing, by as much as 180% in some regions, especially in Europe. Yet, despite the historical size of these shocks, Alvarez and Kroen find that the degree to which these increases passed through to consumer inflation remained surprisingly stable when viewed in historical context. Across both advanced economies and emerging markets, a 1 percentage point increase in energy prices translated, on average, into a 0.05 to 0.07 percentage point increase in consumer price inflation. This suggests that the inflation mechanism was not fundamentally altered during the pandemic, even as the scale of shocks intensified.

The authors use a local projections approach to measure the energy pass-through into inflation over a 12-quarter horizon. Their analysis contradicts the idea that a wage-price spiral or new inflation dynamics had taken hold during the COVID era. Instead, the stability of the passthrough coefficient implies an underlying structural rigidity, whereby inflationary responses remain consistent, even amid extreme market fluctuations. This finding holds across multiple inflation metrics, including CPI, PPI, and median inflation, and is reinforced through instrumental variable regressions using exogenous oil supply news shocks from Kanzig (2021).

Non-Linear but Predictable Patterns

While the pass-through rate remained stable, the intensity of inflationary responses varied with the size of the energy shock. The paper identifies strong non-linearities, especially in advanced economies. When energy inflation was modest (around 1%), the pass-through into CPI inflation remained low and short-lived. But as energy inflation increased to levels of 11% or 20%, as seen in several countries during the height of the crisis, the pass-through more than doubled and became significantly more persistent. These findings align with economic models like the (s, S) framework, where firms adjust prices only when shocks exceed a certain threshold.

Interestingly, the shape and intensity of these non-linearities did not change significantly in the post-COVID period. In other words, although larger energy shocks induced stronger inflationary reactions, the nature of this non-linearity remained consistent before and after the pandemic. This stability further supports the view that the inflationary system’s internal mechanics were not structurally altered by the crisis.

Sectoral Energy Dependence: A Key Driver

To explain variations in inflation across industries, the authors delve into the sectoral level, drawing on OECD input-output tables and sectoral inflation data. They construct measures of both direct and total energy dependence, where the latter includes upstream input linkages, and find that sectors highly reliant on energy inputs, such as manufacturing, construction, and agriculture, exhibited faster and sharper inflation responses. For example, a sector with one standard deviation higher energy dependence could experience up to 1 percentage point more inflation in response to the same energy shock. When moving from the least to the most energy-intensive sector, the inflation differential reached over 3 percentage points during the energy peak of early 2022.

Sectors such as finance, education, and professional services, which are less energy-dependent, displayed a more gradual and persistent inflation path. This divergence in timing and magnitude underscores the central importance of production structure in shaping inflation dynamics. Moreover, the findings indicate that energy shocks propagate through production networks in ways that aggregate inflation statistics tend to obscure.

The Role of Price Flexibility in Shock Transmission

Beyond energy dependence, the study highlights another structural variable: sectoral price flexibility. Using data derived from the US Bureau of Labor Statistics and sectoral models by Rubbo (2023), the paper finds that sectors with more frequent price adjustments saw faster and more intense inflation responses. In a sector with both high energy dependence and high price flexibility, inflation surged almost immediately following energy price spikes. In contrast, sectors with stickier prices absorbed the shock more slowly, though their inflation remained elevated for longer.

The interaction between energy dependence and price flexibility proved especially revealing. The researchers estimate that for a given energy shock, like the 33.4% surge in U.S. energy inflation in Q1 2022, a highly energy-dependent and price-flexible sector could see inflation rise by over 3.4 percentage points compared to its more rigid counterparts. These insights stress the need for policymakers to incorporate micro-level dynamics into inflation forecasting and policy design.

Energy Is More Than Oil: The Broader Picture

A significant revelation of the paper is that energy shocks beyond oil, particularly in gas and electricity, have greater inflationary effects due to their upstream position in production networks. While oil price shocks were important, their downstream use limits the extent of their transmission through the economy. Broader energy measures, which include utilities and refined petroleum products, demonstrate stronger and more widespread inflation impacts. This finding challenges the traditional emphasis on oil as the principal energy price indicator and calls for a more nuanced view of energy pricing in macroeconomic analysis.

 Alvarez and Kroen’s study provides one of the most detailed and data-driven accounts of how energy shocks shaped global inflation during a period of extraordinary volatility. Their research shows that while the shocks were unprecedented in size, the transmission mechanisms remained structurally intact, driven largely by sectoral energy exposure and pricing behavior. For policymakers, central banks, and analysts, the message is clear: to understand and manage inflation, one must look beyond aggregates and into the networked, sector-specific pathways through which energy costs translate into prices.