Her Eleftherias Kourtali
Gas prices in Europe rose again last week to more than 180 euros per MWh, mainly reflecting growing geopolitical pressures, according to Capital Economics.
The impact of rising gas prices on eurozone inflation depends on whether and how quickly prices fall again, and to what extent European governments will be able to reduce the blow to consumers. Both are extremely uncertain, so it is worth considering a number of possible scenarios, as noted by Capital Economics.
The house predicts in a positive scenario that the price of gas in Europe will fall from 174 euros per MWh found this week to 25 euros by the end of 2022, as it assumes that both the weather and the Russian foreign policy will be normalized.
However, prices could be much higher if, for example, tensions over Ukraine worsen and Germany does not approve the new Nord Stream 2 gas pipeline.
The following charts illustrate how inflation rates can be affected in two scenarios for gas prices.
In the first, wholesale prices fall from 134 euros per MWh which is the average in December this year, to 25 € / MWh by the end of 2022, according to forecasts by Capital Economics.
And in the second scenario, the price of gas jumps to 200 euros per MWh and remains there.
In the first scenario, as shown in Figure 3, the annual change peaks above + 700% during 2022, and in the second scenario peaks at + 1100%.
There is also huge uncertainty about how much of this increase in gas prices will be fed into retail energy prices, Capital Economics points out.
In the past, electricity, gas, solid fuels and heating-related inflation data, ie household energy inflation, have followed the annual change in gas prices quite closely. This is partly because, in some European countries, electricity prices are closely linked to the wholesale price of gas. Based on this relationship, household energy inflation, which reached just over 20% in November, is likely to peak near 40% (low scenario) and 65% (high scenario), before falling to a very high low levels by the end of next year.
As the annual change in wholesale gas prices falls steadily to around zero by the end of next year in both scenarios, the average household inflation rate in 2022 will be about half of the “peak” found. Therefore, it will be between 20% (low scenario) and 32% (high scenario). And as the share of household energy in inflation in the euro area is 5.0%, the contribution of household energy prices to nominal inflation would average between 1.0% and 1.6% in the low and high scenarios. respectively, in the estimation of Capital Economics.
In practice, he points out, governments are working to limit “transmission” from gas prices to retail prices. The French government froze retail gas prices by the end of next year and the Spanish government cut electricity taxes. Thus, the estimates given above are the upper limit. Capital Economics estimates that government intervention could reduce household energy inflation growth to about half of the levels calculated above, so household energy inflation next year could be between 0.5% and 0 , 8%.
Finally, it is worth noting that the other major component of energy inflation – fuel inflation, which reached 36% in November – is likely to decline sharply next year. Transport fuel prices are closely linked to the price of crude oil. Fuel inflation is likely to fall to zero by the end of 2022, even if oil prices remain stable at current levels, and will fall below zero if Capital Economics forecasts crude oil prices to fall. Brent at $ 60 a barrel by the end of 2022, prove to be right. Overall, then, overall energy inflation is likely to decline next year despite rising gas prices.
Higher gas prices will keep inflation higher for longer than expected next year and reduce real household incomes. This component alone is likely to prove temporary, but will add to the general upward pressure on prices and perhaps inflation expectations in the euro area, which are likely to be a growing concern for ECB policymakers next year, such as concludes Capital Economics.
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Source From: Capital
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