ECB finds gas price surges now hit inflation faster

The European Central Bank said on Monday that wholesale natural gas price changes now pass through to consumer inflation within one to three months in more than half of euro area countries, a sharp acceleration from 2022 that complicates the central bank's efforts to bring inflation back to its 2% target.live.euronext+1

In an Economic Bulletin published Monday, the ECB found that the share of countries with slow pass-through timelines of 13 to 24 months has dropped from roughly 40% to just 5% since 2022, driven by post-crisis market liberalization, more flexible pricing structures, and shorter fixed-term contracts across European energy markets.investinglive+1

Energy Shock Meets Stubborn Inflation

The findings arrive at a fraught moment for the eurozone economy. Wholesale natural gas prices are up more than 140% compared to a year ago, fueled by the war in Iran and constrained global supply, while low storage levels in Europe raise the risk of further increases. Headline eurozone inflation already sits above 3%, and some economists project it could reach 4% by the end of the year.investing+1

The ECB has already raised interest rates twice in recent months, and the faster pass-through of gas prices into consumer costs adds pressure on President Christine Lagarde to weigh further hikes. However, the bulletin offered one reassuring note: electricity prices are now less responsive to gas swings than in previous cycles, as expanding renewable energy production reduces the role of fossil fuels in setting marginal power costs.live.euronext+1

"These developments suggest that shifts in wholesale gas prices may feed through to HICP gas inflation somewhat more swiftly than in the past, but less intensely for HICP electricity inflation," the ECB said.live.euronext

Markets Watch for Second-Round Effects

On Monday, European gas prices declined, with the benchmark Dutch front-month TTF contract falling as growing evidence of maritime tankers finding alternative routes around Persian Gulf chokepoints helped ease extreme risk premia. Still, the structural shift in pass-through speed means the window for policymakers to assess whether a gas-price spike is temporary has narrowed considerably.investing+1

Separately, ECB Governing Council member Fabio Panetta warned at an event in Milan that the distribution of gains from artificial intelligence will also shape inflation dynamics. If AI primarily raises expected labor income, demand could increase before productivity benefits materialize, prolonging inflationary pressures, Panetta said. If automation dominates instead, weaker consumption could cause disinflationary effects to emerge sooner.globalbankingandfinance+1

"Central banks cannot remain on the sidelines," Panetta said, adding that understanding the changes underway is "increasingly essential to central bank credibility."globalbankingandfinance