Repricing inflation risk in an era of repeated energy supply shocks

Repeated energy supply shocks could make inflation more persistent and leave investors insufficiently compensated for inflation uncertainty.

• Energy-price pass-through is non-linear: the sensitivity of the one-year inflation swap at the 75th to 90th percentile of historical energy prices is approximately three times higher than at the median.
• Natural gas is particularly important during inflation-tail events, while stronger demand makes it easier for businesses to pass higher costs on to consumers.
• The duration of a shock matters because distribution chains initially absorb higher costs through margins, but that capacity weakens as disruptions persist.
• Producer-price inflation typically takes 5 to 6 months to reach food inflation and 6 to 7 months to reach core inflation, creating a delayed transmission pipeline.
• Since 2021, realised inflation outcomes have become more positively skewed, while forward curves still reflect assumptions from an era of stable supply chains and mostly transitory disruptions.

Takeaway: Repeated supply shocks may justify a higher inflation-risk premium, so investors should assess whether inflation-linked instruments provide adequate portfolio protection relative to the visible compensation for nominal duration risk.