ECB Faces Faster Inflation Transmission from Energy Prices
The European Central Bank (ECB) is facing another inflation headache as energy prices rise. The sharp increase in gas prices in the second quarter has raised concerns that it may feed through into consumer inflation more quickly than before.
According to the ECB's latest economic bulletin, wholesale gas price changes are expected to show up in euro area consumer inflation within one to three months across more than half of the region. This is a faster rate of transmission compared to the 2021-22 energy shock, where it took over a year for prices to pass through.
The ECB has already adjusted its policy position by raising interest rates by 25 basis points in response to the rising inflation outlook. Policymakers are watching not just the initial energy shock but also its indirect and second-round effects.
ECB President Lagarde has pushed back against the idea that interest rates move directly with energy prices, emphasizing that the relationship is more complex. However, the latest research suggests that the window for policymakers to determine whether a gas-price spike is temporary may be shorter than anticipated.