Gas Price Shocks Fuel Faster Inflation Across Euro Zone

The European Central Bank (ECB) has reported that changes in wholesale gas prices are now passing through to consumer gas inflation more quickly than before across much of the euro area.

The ECB's Economic Bulletin, released on Monday, cites market liberalization since Russia's war on Ukraine as a key factor behind this faster price transmission. Wholesale natural gas prices have risen by over 140% year-on-year due to supply risks and low storage levels in Europe.

The bulletin highlights that for more than half of euro area countries, wholesale gas price changes pass through to gas inflation within one to three months, a faster timetable than in 2022. This is concerning, given that inflation is already above 3% and some economists expect it to reach 4% by the end of the year.

The ECB concludes that electricity prices are less sensitive to gas due to increased renewable output, which reduces gas's role in power generation costs. However, shifts in wholesale gas prices may feed through more swiftly to HICP gas inflation but less intensely to HICP electricity inflation.