Europe’s Inflation Squeeze To Linger Even As Gas Prices Drop
European gas prices are plunging from peaks reached over the summer, but businesses and households will have to wait for relief.
(Bloomberg) -- European gas prices are plunging from the peaks reached over the summer, but businesses and households will have to wait for relief from the squeeze from soaring inflation.
Benchmark futures dropped below €100 ($99) per megawatt-hour this week for the first time since June, due to better-than-expected progress in filling storage facilities and mild weather. That’s down from as high as €342 in late August.
But the slow pass-through to energy bills, and broader price increases across a variety of goods and services, means pressure on incomes will continue. A European Commission study says changes in wholesale natural gas prices are typically only partially passed on to consumers, and can take up to 12 months to materialize. Plus gas prices are still about three times the average for the time of year.
The energy crisis sparked by Russia’s invasion of Ukraine led to an unprecedented surge in inflation across the continent, and governments are spending billions of euros to help consumers and businesses as their economies slip toward recession. The bloc’s energy ministers will meet this week to discuss more emergency measures, including a proposal for a temporary price cap.
Policy makers at the European Central Bank will also assess the latest on energy costs when they meet in Frankfurt this week. However, with many pointing to longer-term inflation risks, they’re expected to hike interest rates by 75 basis points for the second meeting in a row.
“It would matter in the long run if prices remain at these levels. But short term, the moves in market prices cannot be 1:1 translated into headline inflation,” said Aila Mihr, a senior analyst at Danske Bank. “Even at these prices, consumers still will face higher energy bills over the winter.”
The recent better news on gas prices has eased fears of shortages this winter. Bloomberg Economics notes that European energy markets have held up surprisingly well, and supplies of liquefied natural gas helped close some of the gap left by the drop in Russian flows.
What Bloomberg Economics Says:
“Prices have fallen and if the weather is mild, citizens heed the call to curb energy use and some of the worst outcomes get priced out of markets, Europe might benefit from a further drop in energy costs. That could mean a recession is avoided, inflation falls back earlier than anticipated and the European Central Bank can ease off on painful rate increases.”
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And prices may fall even further in the coming days, given the unusually high temperatures in Europe which are delaying the seasonal increase in heating demand.
But this could change once the cold weather finally settles in, and the forward price curve still shows a jump in gas costs in the coming months. Europe may struggle to refill its stockpiles next summer without Russian gas, while competition for the vital fuel with China -- back from Covid lockdowns -- may intensify.
That means long-lasting strains and elevated prices compared with historic levels until a new wave of LNG facilities come online and global supply tightness ease.
“As temperatures start to drop and storages get emptied, market reality of supply-demand mismatch will mean higher prices, translating into further inflationary pressures,” said Katja Yafimava, senior research fellow at the Oxford Institute for Energy Studies. “There is no reason to expect the forward curve to come down.”
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