Rising natural gas prices could affect eurozone consumer inflation more rapidly than in the past, although their impact on electricity prices may be reduced by the growing contribution of renewable energy, according to a European Central Bank (ECB) Economic Bulletin.
European wholesale natural gas prices have increased by more than 140% compared with a year earlier. The conflict involving Iran has constrained global supplies, while low European gas inventories have increased the risk of further price rises.
The ECB said changes in European gas markets following Russia’s invasion of Ukraine in 2022 have accelerated the transmission of wholesale price movements to household energy bills.
Greater price flexibility and increased use of shorter-term contracts mean retail gas prices can respond more quickly to changes in wholesale markets.
Gas Price Changes Reach Consumers Faster
A survey conducted by European Union central banks found that wholesale gas price changes are now reflected in consumer gas inflation within one to three months in more than half of eurozone countries.
In approximately one-tenth of countries, the transmission takes four to six months. In around one-third, the process takes between seven and 12 months.
The proportion of countries reporting a slower transmission period of 13 to 24 months has declined substantially compared with 2022.
The ECB stated: “Specifically, the share of countries reporting a slow transfer within a period of 13 to 24 months has fallen from around 40% to around 5% by 2022,”
The findings indicate that wholesale gas price increases could influence household energy costs and headline inflation sooner than during previous energy market disruptions.
Implications for Inflation and Interest Rates
The ECB’s assessment comes as eurozone inflation is already above 3%, exceeding the central bank’s 2% target.
Some economists expect inflation to reach 4% by the end of the year, potentially adding pressure on the ECB to consider further interest rate increases following its actions over the preceding two months.
However, the report distinguishes between the impact of higher gas prices on household gas bills and their effect on electricity costs.
The expansion of renewable electricity generation has reduced the role of natural gas in determining electricity production costs, limiting the extent to which wholesale gas price movements feed through to electricity inflation.
“These developments suggest that changes in wholesale gas prices may be reflected in HICP gas inflation more rapidly than in the past, but to a lesser extent in HICP electricity inflation,” the ECB said, referring to the Harmonised Index of Consumer Prices.
The analysis suggests that the inflationary consequences of the latest gas price increases will depend partly on national retail pricing arrangements and the changing composition of Europe’s electricity supply.
