Energy prices will drive inflation up across Europe, economists warn


Newsletter: Europe Express

Soaring energy prices will drive inflation up across Europe this year, hurting consumers and threatening the region’s post-pandemic economic recovery, economists warn.

European gas benchmark prices have already tripled this year, even before winter demand peaks. The Norwegian Equinor, one of the largest gas suppliers in Europe, noted last week that high energy prices could last until 2022 and warned of possible price spikes.

“Prepare for a surge in gas inflation in the euro area,” said Claus Vistesen, chief euro area economist at Pantheon Macroeconomics. Rising energy prices will cause “headline inflation in the euro area to accelerate,” added Daniel Kral, economist at Oxford Economics.

There are a number of reasons for the surge in prices, ranging from low European energy stocks and US storms that have dampened Texas gas exports, to a rebound in demand as economies reopen. Climate change policies that seek to incorporate the higher carbon price have also had an effect.

The Eurozone’s consumer price index for energy has already reached its highest level since the record started in 1996. In August, its annual increase of 15.4%, the biggest jump in the series since the global financial crisis, has pushed the euro area’s headline inflation rate to a decade. high 3 percent.

This is well above the European Central Bank’s 2% inflation target. But ECB officials and economists have said they expect the rise to be temporary, due to one-off factors such as supply chain disruptions as the developed world emerges from the pandemic.

Nonetheless, a prolonged rise in energy prices could derail these inflation forecasts. Higher energy bills would also affect household budgets and consumer confidence, threatening economic recovery.

Eurozone Harmonized Consumer Price Annual Contribution to Inflation column chart showing that energy is expected to drive inflation up

It “would act as an effective tax increase for households.” . . reduce their discretionary spending and slow the recovery in Europe, which has been largely driven by the rebound in consumer spending, ”said Nick Andrews, analyst at Gavekal, an investment research group.

Energy accounts for almost 10 percent of consumer spending in Europe, hence “the double-digit annual increase in energy prices.” . . has a significant effect, ”said Peter Vanden Houte, ING chief economist.

The impact of rising energy prices goes beyond the EU. In August, the annual rate of energy price inflation rose more than 60% in Norway, topped 20% in Canada and the United States, and recorded double-digit increases in South Korea, in Chile and Mexico.

It had ripple effects on other commodities, driving up the price of oil and potentially food. It also urged governments to respond.

Last week Spain announced a € 3 billion raid on energy company profits. The Italian government has already spent around 1.2 billion euros to subsidize consumers’ bills. Some EU lawmakers have also called for an investigation into whether Russian gas exporter Gazprom has manipulated gas prices.

Line graph of the index, 2015 = 100 showing The harmonized euro area consumer price index for energy hit a record high in August

Alexei Miller, director of Gazprom, said on Friday that low inventories could force European gas prices to new highs during the winter, according to the Tass state news wire.

On top of that, the price of carbon permits, a central part of the EU’s plans to cut emissions, has almost doubled this year. This “suggests that energy bills will be higher in the future,” said Jessica Hinds, economist at Capital Economics.

The immediate inflationary impact of rising energy prices is virtually indisputable. Barclays economist Silvia Ardagna estimated that this could push headline inflation in the eurozone to a peak of 4.3% in November.

Whether this will lead to higher core inflation – a measure that eliminates volatile energy and food prices and which the ECB monitors when assessing whether to change monetary policy – is another question.

“Higher energy inflation alone will not push the ECB,” Vistesen said.

Line chart of Euro per tonne showing the EU Emissions Trading System carbon market price

Rising energy prices will also not necessarily lead to a slowdown in overall growth, as the high household savings accumulated during the lockdown could leave consumers’ purchasing power largely unchanged.

The recovery in employment, reflected by the high number of vacancies, could also help. “We are not making any changes to our growth outlook at this time,” said Ardagna.

Yet high energy costs will undoubtedly be a problem for many, whether they are less affluent individuals or businesses for whom energy is an important input.

“A cold snap at the start of winter is now a real economic threat, for low-income households and some manufacturing sectors,” Vistesen said.

Additional reporting by Max Seddon in Moscow


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