ECB Warns of Quicker Inflation Response Amid Wholesale Gas Price Surge

The European Central Bank (ECB) has reported that wholesale gas price changes are now reaching consumer gas inflation more quickly than in the past across much of the euro area. According to the ECB's Economic Bulletin, market liberalisation since Russia's 2022 war on Ukraine has led to more flexible pricing and shorter fixed-term contracts, making retail prices more responsive.

Wholesale natural gas prices have risen over 140% year-on-year amid supply risks, fueling expectations that euro zone inflation will reach 4% by year-end. A survey by the bloc's central banks finds that wholesale gas price changes pass through to gas inflation within one to three months in more than half of euro area countries.

For about a tenth of countries, the pass-through takes four to six months, while for one third it takes seven to 12 months. The share of countries reporting a slower transmission period of 13 to 24 months has fallen to around 5% from roughly 40% since 2022.

The ECB concludes that electricity prices are less sensitive to gas than they used to be because renewable output has increased and gas now plays a smaller role in power generation costs. It says shifts in wholesale gas prices may therefore feed through more swiftly to HICP gas inflation, but less intensely to HICP electricity inflation.

The findings matter because inflation is already above 3%, exceeding the ECB's 2% target, and some economists expect it to reach 4% by the end of the year. That outlook adds pressure on the central bank to raise interest rates again after two increases in recent months.