Euro Area Firms Blame Energy Costs for Inflation Surge

The recent surge in energy prices has pushed up inflation in the euro area. To understand whether this is driven by demand or supply, the European Central Bank (ECB) analyzed firms' views on inflation through two approaches: textual analysis and empirical models.

Central banks care about distinguishing between demand-driven and supply-driven inflation because it affects their policy response. Demand-driven inflation requires a firm policy reaction, whereas supply-driven inflation is often caused by factors outside the central bank's control, such as energy price shocks.

The war in the Middle East has triggered a sharp increase in crude oil prices since February 2026, pushing euro area headline inflation up from 1.9% to 2.8% year-on-year. Firms' attention to inflation and inflation risks intensified after the conflict began, but remained below levels seen during Russia's invasion of Ukraine in 2022.

Textual analysis of corporate earnings calls and financial press articles revealed that supply narratives, stories about energy costs and supply chain disruptions, dominated demand-side narratives this time around. In contrast, there was a broader mix of narratives in 2022, with greater prominence given to supply chain disruptions.