Europe's gas price surge may feed into inflation more quickly, ECB finds

FRANKFURT, Sept 21 (Reuters) — Natural gas price surges are likely to feed into euro zone inflation faster than in the past but will have a smaller impact on electricity costs given the rise of renewable production, the European Central Bank said in an Economic Bulletin on Monday. Wholesale natural gas prices are up more than 140% compared to a year earlier as the war in Iran has limited global supply, and low storage levels in Europe raise the risk of further price increases. Gas markets have been increasingly liberalised in Europe since Russia's war on Ukraine in 2022 curtailed supply.

Subsequent changes, which include more flexible pricing and shorter fixed-term contracts, mean that retail prices will also respond more quickly, the ECB said. A survey by the bloc's central banks found that changes in wholesale gas prices will be passed onto gas inflation within 1 to 3 months in over than half of the euro area countries, up from 2022. For around a 10th of the countries the pass-through is within 4 to 6 months and for one third, it is 7 to 12 months. "Notably, the share of countries to report a slow pass-through within 13 to 24 months has decreased from around 40% to around 5% since 2022," the ECB added.

The findings are significant as inflation is already above 3%, in excess of the ECB’s 2% target, and some economists expect it to reach 4% by the close of the year, putting pressure on the ECB to raise interest rates even after two hikes in recent months. However, electricity prices are less responsive to gas than they used to be because increased renewable production means gas plays a reduced role in costs, the ECB concluded.

"These developments suggest that shifts in wholesale gas prices may feed through to HICP gas inflation somewhat more swiftly than in the past, but less intensely for HICP electricity inflation," the ECB said, referring to the Harmonised Index of Consumer Prices. net)