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QuantiaQuantitative economics
Data model QM-03 · Inflation

Energy Passthrough Model

A distributed lag from an input cost shock to headline and core inflation

Reference QM-03Inputs 8 assumptionsOutputs 4 metrics, 2 exhibitsRuns In your browser
Charts and figures under review

Push an energy price shock through three channels running on different lags and watch what reaches headline and core inflation quarter by quarter. The anchoring setting is what separates a shock that passes through from one that propagates.

The model executes entirely in the browser. No assumption entered here is transmitted or retained. Use Copy results to export the full assumption set and output for use in a note or spreadsheet.

What the model does

It pushes an energy price shock through three transmission channels that operate on different lags, and reports what reaches headline and core consumer price inflation in each of the following twelve quarters. The value is not the point estimate. It is that the three channels are separated, because they behave differently and only one of them should worry a central bank.

Direct, within weeks

Motor fuel and household energy sit in the consumer basket and reprice almost immediately. The contribution is the energy weight multiplied by a passthrough coefficient multiplied by the year-on-year energy price change. It is mechanical, it is large, and it reverses when the price does.

directq = we × φd × πeq we is the energy weight in the basket, φd the direct passthrough coefficient, and πe the year-on-year change in the energy price index.

Indirect, two to four quarters

Transport, distribution, petrochemical feedstock and fertiliser costs feed into goods and services prices with a lag. The model applies a fixed lag profile peaking at three quarters, scaled by the share of the core basket with meaningful energy exposure.

indirectq = sc × φi × Σk ωk πeq-k ,  ω = [0, .10, .20, .25, .20, .15, .10] sc is the exposed share of the core basket and φi the indirect passthrough coefficient. The lag weights are fixed and stated rather than fitted.

Second round, a year or more

Wage bargaining responds to realised inflation, and that feeds back into prices. This is the only channel that converts a temporary supply shock into a persistent inflation problem, and it is behavioural rather than mechanical, which is why it is scaled by how well expectations are anchored.

secondq = β × (1 − α) × mean(headlineq-4 … headlineq-6) β is the wage response coefficient and α the anchoring parameter, where one is fully anchored and the channel is closed.

Interpreting the output

The configuration that matters is the relationship between the two lines. Headline rising while core stays broadly flat is a shock passing through mechanically: it will fade as the base effect drops out, and it requires no policy response to do so. Headline and core rising together is propagation, and that is a different object requiring a different answer.

This is the test applied in QR-08, and it is why the sequence of forecast revisions in 2026, with headline repeatedly revised up and core left broadly unchanged, was read as reassuring rather than alarming.

The anchoring slider is the one to experiment with. Move it from 0.8 to 0.4 and watch the core line stop returning to zero. That transition, rather than the size of the shock, is what separates the 1970s from the episodes since.

Applications

  • Macroeconomic researchers. A transparent alternative to a full structural model when the question is only how much of an input cost shock reaches consumer prices and when. Every coefficient is a slider rather than an estimate buried in an appendix.
  • Rates and inflation strategists. Size the contribution to a headline print from an observed commodity move, and test how much anchoring would have to deteriorate before the core forecast has to move.
  • Corporate pricing and procurement teams. The indirect channel is the one that determines input costs for anything with transport, packaging or feedstock exposure. The lag profile tells you when to expect it rather than only how large it will be.
  • Energy and utilities analysts. Run the shock in reverse. A negative energy price change gives the disinflationary contribution with the same lag structure.

Limitations

Every model is a simplification and this one is explicit about which simplifications it makes.

  • The lag weights are fixed and stated rather than estimated from data. They are a reasonable central profile for advanced economies and should be recalibrated for any economy with a different energy intensity or pricing structure.
  • It is linear and symmetric. Real passthrough is well documented to be asymmetric, with price increases reaching consumers faster and more completely than decreases.
  • There is no exchange rate channel, which for an energy-importing economy with a floating currency can be as large as the direct channel.
  • It captures no policy response. A central bank reacting to the shock would alter the path, and that feedback is deliberately excluded so the underlying passthrough is visible.
  • Anchoring is treated as a fixed parameter. In reality it is a function of the central bank's track record and can erode as a consequence of the very shock being modelled.

Use in client and published work

The model is free to use and the specification above is published so that results can be reproduced independently. Figures generated here should be cited with the model reference and assumption set, as with any other calculation. Extension, recalibration to a specific market, or integration with proprietary data are all within scope of a standard engagement: contact@quantiaconsulting.online.