Impact of Natural Gas Prices on Euro Zone Inflation

FRANKFURT (Reuters) – Natural gas price shocks increasingly affect euro zone inflation, although they still have a smaller impact than oil price fluctuations, according to new research from the European Central Bank published on Monday.

Background

Natural gas prices surged at the onset of Russia’s war in Ukraine in early 2022, driving euro zone inflation into double digits by autumn of that year and initiating the ECB’s most significant rate hike cycle to date.

Previously, gas prices were closely tied to oil prices, but over the last two decades, they have decoupled as gas markets liberalized, allowing gas to assume a unique, standalone role.

Key Findings

• Gas price shocks result in about one-third smaller pass-through to headline inflation compared to oil price shocks, as noted by the paper’s authors, economists from Banco de Espana and the ECB.
• Gas is more influential on the production side rather than the consumption basket, leading to dominant indirect effects.
• A 10% increase in gas prices results in an estimated pass-through of 0.1 percentage points, with persistent inflationary effects lasting beyond one year.

Considering the nearly 200% surge in gas prices from early 2022 to their peak in August 2022, this translates to an inflation increase of roughly 2 percentage points, as estimated by the researchers.

Despite gas prices retreating since then and downward pressure on inflation from energy prices for much of this year, researchers indicate that unexpected gas price shocks significantly impact countries that rely heavily on gas for production or power generation.

Country-Specific Impact

The study suggests that unexpected gas price changes have a more significant effect on inflation in Germany, Spain, and Italy than in France.