FRANKFURT (Reuters) – Natural gas price shocks are having an increasingly significant impact on inflation in the euro zone, although still not as strong as oil price fluctuations, a European Central Bank study published on Monday shows.
When the war between Russia and Ukraine began in early 2022, natural gas prices soared, helping to push eurozone inflation into double digits by the fall of that year, triggering the ECB’s steepest rate hike cycle yet.
Gas prices used to be linked to oil prices, but over the last two decades, as markets have liberalised, there has been a decoupling between the two and gas now plays a unique, independent role.
“Compared to oil price shocks, gas price shocks have about a third less impact on overall inflation,” explained the authors of the study, economists at the Banco de Espana and the ECB.
“Gas is more important on the production side than in the basket of goods, so the indirect effects dominate,” the paper says.
The authors argue that a 10 percent increase in the price of gas results in a pass-through of about 0.1 percentage points and has a persistent inflationary effect beyond one year.
“Considering that the increase in gas prices between the beginning of 2022 and the peak reached in August 2022 was almost 200 percent, this would correspond to an increase in inflation of about 2 percentage points,” the paper estimates.
Gas prices have declined since then, and energy prices exerted downward pressure on inflation for much of the year, with natural gas prices moving in a relatively narrow range around their mid-2021 levels.
Unexpected gas price shocks would have a greater inflationary impact on countries that tend to have more intensive gas use in manufacturing or electricity generation, the researchers said.
“Our results suggest that unexpected gas price changes play a larger role in inflation in Germany, Spain and Italy than in France,” the newspaper said.
(Reporting by Balazs Koranyi; Editing by Susan Fenton)
