Its impact on consumer prices has been three times more dramatic than that of the wholesale gas benchmark in Europe, but the link is likely to strengthen over time.
UBS expects eurozone inflation to be 2.4% this year, well above the European Central Bank’s target of “below, but close to, 2%”. Energy is responsible for the lion’s share of inflation, which includes the effects of current price hikes and extremely low prices over the past year. ECB officials, like their peers at the US Federal Reserve, have just taken note of the “transient” factors behind inflation, but that hasn’t stopped the market from raising expectations of rate hikes in recent weeks.
The pressure on Europe’s central bankers could be a whole lot worse – and could be in the future. Energy bills account for a large part of the consumer-price index: 9.5% in the Eurozone and 6% in the UK.
European governments use regulation and price controls to protect households from large jumps in their energy costs. In many countries, standard rates for gas and electricity are set and adjusted from time to time. In response to the latest crisis, some governments have also introduced price limits, cut energy taxes and offered support for some low-income families or small businesses.
Politicians worry that a surge in bills could alienate voters or undermine public support for the energy transition. A proposed fuel-tax hike in France in 2018 sparked high-profile public protest and a humble ascent for President Emmanuel Macron.
But protecting consumers has an uncomfortable knocking effect. Price caps have hit utility suppliers: Utility stocks have underperformed European benchmarks since February, and a handful of retail suppliers have busted in the UK, including two more on Wednesday. Other crisis-era support measures include risk-taking governments, adding to the post-Covid burden on public finances.
There are also structural changes that will make natural gas prices more strongly linked to inflation over time. Many companies secure their supply with long-term contracts, but a growing number do not. The move to buy more gas in the spot markets from longer-term contracts using oil-linked prices will increase the inflation effect from gas and reduce the impact of oil. Higher gas prices are also likely to feed into new long-term contracts.
Another factor: gas is set to become a bigger part of Europe’s energy mix as the region is increasingly being used to replace coal-fired electricity and cover gaps in renewable electricity generation. Exposure currently varies by country: the UK is on the sharp edge of the current crisis partly because it generates almost a third of its electricity from gas, compared to a quarter in Germany and 15% in France, which historically have been on the edge of its neighbours. is more dependent than on nuclear plants.
The next time gas prices jump in Europe, investors can expect more worries about inflation.
Rochelle Toplensky [email protected] . Feather