Shock absorbers? Energy prices, labour market slack and monetary policy: a view through the lens of a structural model - Bank Underground

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Daniel Albuquerque, Jamie Lenney, Matthew McKernan, David Murakami, Peter Paz and Philip Schnattinger Wholesale energy prices surged in 2021 and again in 2022, but UK inflation remained high well beyond the direct pass-through of higher energy costs. With energy prices moving sharply again following the recent conflict in the Middle East, could a similar scenario happen again? We use a structural macroeconomic model to show that the answer depends on labour market conditions. When workers are scarce, they are better able to recoup real income losses through higher wages, raising firms’ costs and broadening inflationary pressure.