New IMFS Working Paper by Hendrik Hegemann and Volker Wieland on "Scenarios Concerning the Possible Consequences of the Iran War for Euro Area Inflation"
In this note, we provide a brief first quantitative assessment of possible consequences of the energy price shock for euro area inflation. We consider different scenarios of more or less per-sistent increases of gasoline, diesel, natural gas, kerosine price increases on headline and core HICP inflation. The quantitative analysis is based on an estimated Bayesian Vector Autoregres-sion model for the euro area. The model also accounts for transmission via electricity prices. The baseline scenario is based on the recent, average, price increases extending for two to three months, followed by a development determined endogenously within the BVAR. In this case, year-on-year inflation rises by about 1.5 percentage points by the first half of 2027. Core inflation rises by about 0.5 percentage points. If energy prices are assumed to return to Febru-ary 2026 levels within a few months, the effects are much smaller and less persistent. Monetary policy should not respond directly to movements in energy prices and headline consumer price inflation. However, monetary policy would need to tighten in response to rising core HICP and domestic inflation.