The degree to which changes in wholesale energy prices feed into consumer prices, both directly via fuel and electricity bills and indirectly via production and transport costs embedded in other goods and services. Pass-through is partial, lagged, and asymmetric — rising faster than it falls.
How it works
Direct pass-through hits the energy components of CPI/HICP near-instantly; indirect (second-round) pass-through filters through input costs, wages, and margins over several quarters. The magnitude depends on tax structure, retail-price regulation, hedging, and the persistence of the shock — central banks distinguish first-round effects (look through) from second-round effects (respond).
Why it matters now
As the 2022-23 energy shock unwinds, base effects mean energy is now a disinflationary drag — and the key 2025-26 question is whether that fade is faster than the stickier core, determining how quickly headline converges to target.
Example
After the 2022 gas spike, euro-area HICP energy inflation peaked above 40% year-on-year in late 2022; by mid-2023 sharply negative base effects turned energy into a headline drag even as core HICP held near 5%, illustrating energy pass-through fading faster than core.
Frequently asked
- What is energy pass-through?
- Energy pass-through is the degree to which changes in wholesale energy prices feed into consumer prices, both directly through fuel and electricity bills and indirectly through production and transport costs embedded in other goods. It is partial, lagged, and asymmetric — prices rise faster than they fall. In the euro area, direct effects hit HICP energy components near-instantly, while indirect effects filter through over several quarters.
- Why does energy pass-through matter for inflation in 2025-26?
- Energy pass-through determines how quickly headline inflation converges to target as the 2022-23 shock unwinds. With base effects now negative, energy has become a disinflationary drag rather than a driver. The key question for 2025-26 is whether that energy fade outpaces stickier core inflation, governing the speed of headline normalization toward the ECB and Fed 2% goals.
- Why is energy pass-through asymmetric?
- Energy pass-through is asymmetric because retail prices rise faster when wholesale costs climb than they fall when costs ease, a pattern sometimes called 'rockets and feathers.' Firms pass higher input costs quickly to protect margins but delay cuts to recapture margin. Retail-price regulation, hedging, fuel taxes, and competitive structure all shape the speed and completeness of pass-through in each direction.
- How do central banks treat first-round versus second-round energy effects?
- Central banks look through first-round energy effects — the direct, mechanical hit to headline inflation — but respond to second-round effects, where energy costs feed into wages, margins, and broader prices. The distinction drives policy: a transitory direct spike warrants patience, while evidence of indirect spillover into core or inflation expectations justifies tightening, as seen during the 2022-23 episode.