Explosive increases in natural gas prices are likely to be reflected more quickly than in the past in eurozone inflation, but will have a smaller impact on electricity prices, given the rise in renewable energy generation, the European Central Bank (ECB) said on Monday in an economic bulletin, Reuters reports, according to Agerpres.

Wholesale natural gas prices have risen by more than 140% compared with their level a year ago, amid the war in Iran, which has limited the global supply of liquefied gas, while low storage levels in Europe are increasing the risk of further price rises.

European gas markets were liberalised after the war launched by Russia against Ukraine in 2022 reduced supplies. In view of the changes subsequently made, including more flexible pricing mechanisms and shorter fixed-term contracts, consumer prices will also respond more rapidly, the ECB said.

A survey conducted by central banks shows that in more than half of the eurozone countries, changes in wholesale gas prices are reflected in the relevant inflation figures within one to three months, a change from the situation in 2022. In approximately one-tenth of countries, this pass-through takes place within four to six months, while in one-third it takes between seven and 12 months.

“It is noteworthy that the share of countries reporting a slow pass-through, over a period of 13 to 24 months, has fallen from approximately 40% to around 5%,” the ECB added.

These findings are important as eurozone inflation has crossed the 3% threshold, exceeding the 2% target set by the ECB, while some economists estimate that it will reach 4% by the end of the year, putting pressure on the guardians of the euro to raise interest rates, despite the two rate increases decided recently.

However, the ECB found that electricity prices are less sensitive to fluctuations in gas prices than in the past, as the increase in renewable energy generation has reduced the share of gas in the cost structure.

“These developments suggest that changes in wholesale gas prices could be reflected in HICP inflation for gas somewhat more rapidly than in the past, but with lower intensity in HICP inflation for electricity,” the ECB said, referring to the Harmonised Index of Consumer Prices (HICP).

European countries that depend on natural gas for heating hesitated to fill their storage facilities during the summer, hoping that the current conflict in Iran would end and prices would fall. With gas storage levels well below the historical average, these countries are now rushing to store gas, thereby contributing to a rise in natural gas prices to their highest level in four years. This will probably lead to higher heating and electricity costs for households and companies, further fuelling inflation.

Source – AGERPRES