Gas Price Surge Feeds Inflation Faster in Euro Zone

The European Central Bank (ECB) has found that the recent surge in gas prices may feed into inflation faster than before, but will have a smaller impact on electricity costs due to the rise of renewable production.

Wholesale natural gas prices have increased by over 140 percent compared to last year, largely due to the war in Iran limiting global supply and low storage levels in Europe raising the risk of further price increases.

The ECB's Economic Bulletin states that gas markets have become increasingly liberalized since Russia's war on Ukraine in 2022, leading to more flexible pricing and shorter fixed-term contracts. As a result, retail prices will respond more quickly to changes in wholesale gas prices.

A survey by the bloc's central banks found that over half of euro area countries will pass through changes in wholesale gas prices to inflation within 1-3 months, up from 2022. In around 10 percent of countries, this process takes 4-6 months, and in one third, it is 7-12 months.