Europe's Energy Security Conundrum: How Gas Supply Risk Fuels Inflation

A recent study by CEPR examined how natural gas supply risk affects inflation in Europe. The researchers found that disruptions to gas flows, such as those experienced during the 2022 Russian gas cutoff, can lead to persistent inflation even when physical adjustment limits aggregate output losses.

The study distinguished between current-flow disruptions and future-supply news, finding that supply-security news generates larger and more persistent consumer-price effects than a realised flow disruption. Supply-security news does not reduce measured gas supply on impact but raises inventories and financial-market volatility, keeping gas prices elevated for longer.

In contrast to realised flow disruptions, which have limited consumer-price pass-through in both the euro area and the US, supply-security news leaves industrial production close to baseline while the implied pass-through rises from around 2% on impact to roughly 5% after about one year. The researchers suggest that this is due to precautionary inventory accumulation and heightened uncertainty about future availability.

The study's findings have policy implications for energy security, highlighting the need to make future supply more credible by securing alternative supplies and clearly communicating how future gas needs will be met. This means not simply replacing lost gas today but also ensuring that households, firms, and markets have credible reasons to expect supply to remain available tomorrow.