How much more can a new increase in natural gas prices lead to an escalation of inflation in Europe? Probably a lot, but perhaps not as much as the recent data that has rocked the markets over the past few days. We currently expect inflation in Europe to peak in the last quarter of this year, averaging 12% yoy in the UK and 9.6% in the growing eurozone. Our estimates are, of course, based on energy prices at the beginning of August. Since then, wholesale natural gas prices have risen even more, by almost 80 euros/MWh, to about 280 euros at the beginning of the week. However, extremely volatile natural gas prices may soon decline, but what if they stay at Tuesday’s levels? In general, it can be said that its steady increase of 100 euros will raise the level of consumer prices in the eurozone by about 5%, once it is fully passed on to consumers. Households are suffering from rising prices for natural gas, electricity, food and services that are indirectly or directly produced by natural gas. An additional payment of 80 euros will increase the inflation rate by 4%. However, the immediate impact is likely to be more limited even if volatile wholesale prices remain at current levels. The transition to a consumer audience will take time and will not be complete.

High energy prices are pushing back the peak of inflation from the end of the year to the first quarter of 2023.

We hope that at some point gas prices will come down from today’s high levels. But if they remain at current levels, they will lead to a serious surge in inflation and exacerbate the recession in Europe. The peak of inflation will shift from the fourth quarter of this year to early 2023 because it will take time for these higher gas prices to be reflected in consumption. And the outlook for many companies across a range of industries will worsen as they are squeezed between higher costs and recession-strapped demand for their products and services. In addition, such a peak in inflation will increase the pressure on government budgets, which will almost certainly cover part of the costs, and the dilemma of central banks will deepen. On the one hand, higher inflation and the need for higher wages to compensate for the past, and on the other, inflated energy bills that will empty the wallets of consumers.

* Mr. Holger Schmieding is an economist at Berenberg Bank.