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Abstract

This paper examines how natural gas price shocks affect Italian firms' pricing decisions and inflation expectations using quarterly survey data from the Bank of Italy's Survey on Inflation and Growth Expectations (SIGE) spanning 1999Q4-2025Q2. We identify natural gas price shocks through a Bayesian VAR with sign and zero restrictions. Our findings reveal that these shocks are a primary driver of firms' inflation expectations, particularly during the post-COVID period (2021-2023) when supply disruptions following Russia's invasion of Ukraine generated unprecedented price pressures. We then estimate a larger BVAR incorporating firm-level price setting variables and macro aggregates, documenting that gas price shocks generate persistent increases in both firms' current and expected prices, alongside elevated inflation uncertainty. We uncover substantial non-linearities using state-dependent local projections: under high uncertainty, firms successfully pass through cost increases to consumers, maintaining elevated prices; under low uncertainty, recessionary effects dominate, causing firms to reduce prices below baseline.