The ECB says that the increase in gas prices in Europe may lead to inflation occurring more quickly.

The European Central Bank stated in its 'Economic Bulletin' on Monday that the natural gas price increases will likely feed faster into the?inflation in the euro zone than they have in the past, but the impact on electricity prices will be smaller due to the increase in?renewable energy production.

The wholesale natural gas price is up over 140% from a year ago. This is due to the fact that the war in Iran has reduced global supply and the low levels of storage in Europe increase the risk of future price increases.

Since the Russian war in Ukraine in 2022, gas markets have become increasingly liberalized?in Europe. The ECB stated that the retail price will respond faster to subsequent changes such as'more flexible pricing' and a shorter fixed-term contract.

In a survey of central banks in the Eurozone, it was found that wholesale gas price changes will lead to gas inflation in more than half the countries within 1 to 3 month. This is an increase from 2022.

Around a tenth of countries pass through within 4 to 6 month and for a third it takes 7 to 12 months.

The ECB noted that "Notably, since 2022 the number of countries reporting a slow passage-through in the period 13-24 months has dropped from about 40% to?about 5%."

Some economists predict that inflation will reach 4% before the end of the year. This puts pressure on the ECB, even after it has raised interest rates twice in the last few months.

The ECB has concluded that electricity 'prices' are less sensitive to gas now than in the past because of increased production from renewable sources.

The ECB stated that "These developments imply that changes in wholesale 'gas prices could feed through to HICP 'gas inflation more quickly than in the past but less intensely in the case of HICP electricity price inflation."

(source: Reuters)