Featured Research

Understanding how energy costs feed into CPI is crucial for accurately interpreting headline inflation in Europe. Both Spain and Italy offer unique case studies of how specific retail energy series can serve as clean, forward-looking indicators of CPI dynamics. By focusing on the mechanisms that link wholesale energy markets to consumer bills, we can better explain why inflation moves differently across countries and why some proxies are more reliable than others.

Spain

Energy is one of the most volatile parts of Spain’s inflation basket, with electricity alone making up about 3–4% of headline CPI. But not all households are affected in the same way. Roughly 11 million households, about 38% of the total, remain on the regulated PVPC tariff, where bills move almost one-for-one with wholesale electricity prices. The other 18 million households are on free-market contracts, where adjustments happen only at contract renewal and are far less volatile.

This dual system explains why Spain CPI often looks muted even when wholesale markets swing. Tracking wholesale prices alone exaggerates the inflationary impact, while looking only at retail bills understates it. Turnleaf controls directly for PVPC prices, which show a tight correlation with the electricity component of CPI, especially visible during the 2021–22 energy crisis when both spiked together (Figure 1). Anchoring our model on PVPC captures the fast-moving channel of shocks that drive immediate CPI moves, while also recognizing that most households absorb changes more gradually.

PVPC thus emerges as the cleanest and most accurate proxy for translating energy price swings into Spanish CPI.

Figure 1

Italy

In Italy, heating oil, although a small component of the consumer basket and mostly relevant for rural households, has proven a surprisingly effective indicator in inflation models. Its strength lies in how closely heating oil prices mirror global crude oil benchmarks, refining margins, and exchange rates, effectively condensing these drivers into a single retail series.

Specifically, heating oil prices move with the interaction of Brent crude and diesel (gasoil) crack spreads. When crude prices fall faster than cracks narrow, refined product prices such as diesel and heating oil drop more than proportionally. As a result, heating oil serves as a convenient stand-in for spot diesel prices, which are harder to obtain directly, while still explaining month-on-month changes in diesel-intensive CPI categories such as housing and transport.

Because heating oil integrates global drivers into a clean, readily available retail series, it provides a less noisy and more effective proxy for underlying energy price dynamics in Italy (Figure 2).

Figure 2

Spain and Italy highlight two distinct but complementary approaches to capturing the impact of energy on inflation. In Spain, the regulated PVPC tariff serves as a direct and timely link between wholesale electricity prices and CPI. In Italy, heating oil acts as a condensed proxy for global energy forces shaping fuel costs. Together, these cases illustrate how careful selection of retail energy indicators improves the accuracy of  inflation models, helping Turnleaf separate noise from signal in volatile markets.