Europe’s crazy jump in gas prices is having surprisingly little impact on inflation in the region. In another year, though, the effect could be more dramatic.
European wholesale gas prices on spot markets have roughly tripled this year, but the average retail consumer gas price is up only about 9%, according to UBS.
an economist at the bank, estimates the impact on the region’s inflation at about 0.4 percentage points. By comparison, a more moderate 50% rise in oil prices added 0.6 percentage points to inflation.
UBS expects eurozone inflation to be 2.4% this year, overshooting the European Central Bank’s target of “below, but close to, 2%.” Energy is responsible for the lion’s share of inflation, including the effects of both current price rises and last year’s extremely low prices. Like their peers at the U.S. Federal Reserve, ECB officials have noted the “transitory” factors behind inflation right now, but that hasn’t stopped the market from pulling forward its expectations for rate increases in recent weeks.
The pressure on Europe’s central bankers could be a whole lot worse—and might be in future. Energy bills account for a big chunk of consumer-price indexes: 9.5% in the eurozone and 6% in the U.K. For now, consumers are mostly insulated from the gas market’s gyrations, but the situation doesn’t seem wholly sustainable.
Europe’s governments use regulation and price controls to shield households from big jumps in their energy costs. In many countries, standard rates are set for gas and electricity and adjusted periodically. In response to the latest crisis, some governments also have introduced price caps, cut energy taxes and offered support for some lower-income households or small businesses.
Politicians worry that a jump in bills could alienate voters or undermine public support for the energy transition. A proposed fuel-tax rise in France in 2018 sparked high-profile public protests and a humbling climbdown for President
But protecting consumers has uncomfortable knock-on effects. Price caps have hit utility suppliers: Utility stocks have underperformed the European benchmark since February, and a handful of retail suppliers have gone bust in the U.K., including two more on Wednesday. Other crisis-era support measures involve governments shouldering the risk, adding to the post-Covid burden on public finances.
There are also structural changes that will more strongly link natural gas prices to inflation over time. Many companies secure their supply with long-term contracts, but an increasing number don’t. Moving from long-term contracts using oil-linked prices to buying more gas on spot markets will increase the inflation effect from gas and reduce the impact of oil. Higher gas prices are likely to feed through into new long-term contracts, too.
Another factor: Gas is set to become a bigger part of Europe’s energy mix as the region decarbonizes, replacing coal-fired power and being used to cover gaps in renewable power generation. Exposure currently varies by country: Britain is at the sharp edge of the current crisis partly because it generates roughly a third of its power from gas, compared with a quarter in Germany and 15% in France, which has historically relied more heavily than its neighbors on nuclear plants.
Next time gas prices leap in Europe, investors can expect more worries about inflation.
Write to Rochelle Toplensky at firstname.lastname@example.org
Heard Stock-Picking Leaderboard
Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8