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Fossilflation: what it is and why it drives inflation
One term has been appearing with growing frequency in statements from major central banks since the outbreak of the war involving the United States, Israel and Iran: “fossilflation.” It describes a specific form of inflation driven directly by shocks in oil and natural gas prices.
Understanding and identifying fossilflation matters because its underlying drivers can no longer be treated simply as external shocks. The global economy has entered a structural cycle in which energy supply security is only part of the problem.
The relationship between energy crises and rising prices is undeniable. The closure of the Strait of Hormuz, through which roughly 20% of the world’s oil and liquefied natural gas flows, drove significant increases in the cost of essential goods and services, including electricity, fuel, transportation and food, across Asia, Africa, Europe and the Americas.
As Petya Koeva Brooks, deputy director of the International Monetary Fund’s Research Department, explained, the latest crisis prompted an upward revision to headline global inflation, now projected at 4.7%. Asian economies are generally among the most exposed, particularly the Philippines, because of their heavy reliance on imports.
There is, however, some encouraging news. “The global economy has weathered the war shock better than feared so far,” Brooks said.
Fossilflation, climateflation or greenflation?
The term fossilflation gained prominence in a speech delivered by Isabel Schnabel, a member of the European Central Bank’s Executive Board, in Frankfurt on March 17, 2022, just weeks after Russia invaded Ukraine.
“Fossilflation is to blame for much of the recent strong increase in euro area inflation,” Schnabel said at the time. In February 2022, she noted, energy accounted for more than 50% of headline inflation in the euro area, largely reflecting sharp increases in oil and gas prices.
But Schnabel’s argument went further. She identified three sources of inflation associated with energy and climate change that have since become widely used concepts in financial and economic discussions: fossilflation, climateflation and greenflation. They are distinct, but increasingly interconnected, sources of price pressure.
Climateflation
Climateflation, or climate-driven inflation, reflects the growing impact of climate change on prices, particularly food prices. As global temperatures rise, changes in precipitation patterns and extreme weather are becoming increasingly important sources of economic disruption.
The United Nations estimates that global temperatures between 2026 and 2030 could be between 1.3°C and 1.9°C above the 1850-1900 average. Some regions are expected to become increasingly dry, while others face heavier and more extreme rainfall.
Agricultural productivity is already being affected, with lower yields, less predictable supplies and more volatile prices. The impact is not merely theoretical. A 2024 study estimated that extreme heat during the summer of 2022 increased European food inflation by 0.43 to 0.93 percentage points. Based on projected warming through 2035, the researchers estimated that the effect could become 30% to 50% larger.
The actual impact could prove even greater. Many existing economic and climate models rely heavily on historical data, and accelerating global warming could make past relationships increasingly unreliable as a guide to future conditions.
Greenflation
Then there is greenflation, a term coined by Indian economist Ruchir Sharma to describe cost pressures associated with the investments required for the green transition, particularly rising demand for critical minerals such as lithium, cobalt and copper.
Here, the main concern is longer term. The faster energy decarbonization proceeds, the greater the demand for raw materials needed to manufacture solar panels, batteries and wind turbines. Supply for many of these materials is constrained in the short and medium term.
However, economic research and the ECB broadly indicate that the impact of greenflation on final consumer prices is considerably smaller than the inflationary pressures associated with either climateflation or fossilflation.
Why fossilflation is different
Finally, there is fossilflation itself, inflation caused by rising and volatile oil and gas prices. It is arguably the most deeply embedded of the three in the global economy and, in some respects, the most predictable.
That is because the fundamental vulnerabilities of fossil fuel markets have changed remarkably little.
An analysis by 350.org estimated that around 68% of global oil production and 81% of reserves are located in countries exposed to U.S. geopolitical pressure, including Iran. Such concentration leaves the global energy system structurally vulnerable to political disruption.
It is therefore hardly surprising that almost every decade has brought its own energy crisis. Wars, revolutions and financial speculation have repeatedly triggered sudden oil market shocks, disrupting economies and raising costs for consumers. Those shocks are now occurring more frequently.
Following Russia’s invasion of Ukraine, eurozone inflation reached 10.6% in October 2022, its highest level in more than four decades, driven in large part by surging fossil fuel prices. Four years later, a similar pattern has emerged, with a different geopolitical epicenter but many of the same economic dynamics.
Europe has made progress. The expansion of renewable energy has increased resilience against energy price shocks and helped absorb part of their impact. Yet the fundamental problem remains: dependence on fossil fuels leaves economies vulnerable, and not only to conflicts that threaten energy security.
Some of the unusually large increases in oil and gas prices are not the result of higher production costs or genuine changes in demand, but of producer strategies. In an oligopolistic market, suppliers can constrain output to support prices and maximize profits, imposing additional costs on net energy importers such as eurozone countries.
At the same time, banks and investment funds have been reducing financing for new oil and gas developments, broadly in line with the International Energy Agency’s net-zero pathway. Higher financing costs can make new fossil fuel projects more expensive, slowing production growth and limiting the speed at which supply can respond to higher prices.
How fossil fuel shocks reach consumers
Higher fossil fuel prices first show up in household energy spending, through electricity and natural gas bills and higher prices at the pump. But the effects then spread across the broader economy.
Natural gas is the primary feedstock used to produce ammonia, and feedstock costs account for roughly 70% to 90% of the cost of producing nitrogen fertilizers. A surge in natural gas prices can therefore raise agricultural input costs and eventually contribute to higher food prices.
Likewise, higher diesel prices increase transportation costs and, ultimately, the price of virtually every product that has to be moved.
A 2025 study by Kozminski University researchers Serhii Druchyn, Adam Juszczak and Jakub Rybacki applied an econometric model to data from European Union countries between 2015 and 2023 to determine how energy price shocks are transmitted to consumers.
The findings were significant: a 10% increase in the effective price of natural gas used for electricity generation raises retail energy inflation by about 0.55 percentage points. For oil, the estimated impact is even greater, at roughly 0.75 percentage points.
The price of carbon under the European Union Emissions Trading System has also become more influential. Its estimated effect on energy inflation rose from around 0.1 percentage points between 2015 and 2020 to approximately 0.6 percentage points after the 2022 energy crisis, suggesting that stressed markets behave differently from markets operating under normal conditions.
“Europe cannot eliminate geopolitical risk, but it can significantly reduce its exposure,” Frank Elderson, a member of the ECB’s Executive Board, has argued.
The most effective way to do that, Elderson said, is to reduce reliance on imported fossil fuels while accelerating an orderly transition toward domestically produced clean energy. If Europe meets its sustainable energy targets, the connection between domestic energy prices and volatility in global energy markets could weaken substantially.