How much did rising energy prices cost us after 2022? New accounts

Analysts from the Polish National Bank have calculated the impact of the increase in energy prices in recent years on the Polish economy. The analysis was reviewed by Bicau Bank experts. It appears that the impact of the Russian aggression against Ukraine was tangible and severe on the Polish economy.

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As they confirmed in their report. The Russian aggression against Ukraine in February 2022 led to a radical increase in energy prices in global markets.

Over several months, prices of energy raw materials have reached their peak: compared to 2019 levels, the price of natural gas has risen almost 11 times, electricity and coal more than five times, and crude oil more than twice. How strong is the cost push resulting from these strong and drastic increases in energy prices and what is their impact on the level of economic activity? – Ask the authors of the analysis.

They point to the NBP report which was prepared using macroeconomic models.

As the study authors emphasize, Supply shocks in energy markets are characterized by a large range of price fluctuations, but they also last for a relatively short period. Already in 2023, we can observe a rapid decline in inflation in the national economy due to the fact that energy prices, after a period of rapid increases, began to fall just as quickly. However, the rapid deceleration in inflation does not mean that price increases in 2022 will be without consequences.

In real terms, the sharp increase in energy costs associated with the war in the East led to a lower level of economic activity, a lower demand for labor and, as a result, a lower household consumption. In contrast, in nominal terms – despite the currently moderate CPI dynamics – the years 2022-2023 left Poland with an increasing level of prices: today the CPI stands at 43.79 percent. Higher than in 2019 – they write

The true effects of a negative supply shock on energy markets are estimated using a computable general equilibrium model.

The authors of the study cited by Pekow – taking into account the structure of the Polish economy and the characteristics of flows between its individual sectors – argue that the increase in the relative prices of imported energy carriers is not fully compensated by the increase in extraction from (relatively cheaper) domestic energy carriers, which means that The supply of energy carriers in the domestic economy is decreasing and their prices are rising.

As households and companies try to replace more expensive energy carriers with cheaper ones (such as natural gas with hard coal), price increases spread more widely, covering later batches of raw materials. Finally, energy price inflation translates into prices for other goods and services, which means higher production costs, lower economic activity, lower demand for labor, lower household incomes, and lower consumption, they write.

The study’s authors estimate the overall impact of the increase in natural gas, coal, and crude oil prices at 2.8%. gross domestic product – How many additional goods and services could the Polish economy have produced without the energy price inflation caused by Russian aggression? Oil prices had the strongest impact (-1.3% of GDP), although their dynamics in 2022-2023 were clearly lower than changes in prices of other energy carriers. The weakest impact was related to coal prices (-0.3% of GDP), possibly due to existing domestic mining capacity. In contrast, the study authors estimate the amount of lost consumption as a result of the shocks discussed at -4.6%. Indicates.

As National Bank analysts concluded in the Pico report, the nominal effects of the energy price shock were estimated using the so-called extended Leontiev model. The rise in energy prices is treated as a production cost shock, which, based on the structure of inter-industry flows in the Polish economy, affects production volumes and prices in markets for individual goods and services.

According to the calculations of the study authors, the increase in energy prices in 2022 was associated with a 10.3% rise in prices in Poland. Compared to the base scenarioAfter taking into account adjustments on the wage side (assuming stagnant real wages, i.e. the nominal index of inflation), the increase in prices was estimated at 15.4%. The calculations also ignore adjustments to margins (assume zero price elasticity of demand), changes in production technology and updates to inflation expectations – price shocks in 2022 are interpreted as pure increases in production costs, which then “spread” through the economy, we read in the analysis .

Gradzewicz et al. (2024) show the high costs of the supply shock associated with Russian aggression in Ukraine: the increase in energy prices in 2022 was captured by Poland by 2.8%. GDP and left prices higher by more than 15%. The size of the costs incurred by the Polish economy is related to its structure, including the large share of imports in the markets for energy raw materials (especially coal).