European Gas Prices Decline as ECB Warns of Faster Inflation Pass-Through

European and UK wholesale natural gas prices fell by more than 2% on Monday, as easing concerns over energy supply risks in the Middle East led to a reduction in the market's risk premium. This short-term price relief, however, comes as the European Central Bank issued a stark warning about structural changes in the energy market that are accelerating the pass-through of price volatility to consumer inflation.

Prices Ease on Alternative Shipping Routes

The benchmark Dutch TTF month-ahead contract, a key indicator for European gas prices, fell 2.5% to €77.55 per megawatt-hour, extending a multi-day pullback. In the UK, the NBP wholesale gas contract declined 2.91% to 192.36 pence per therm, hovering near recent lows.

According to market reports, the price drop was driven by growing evidence that liquified natural gas (LNG) and crude oil tankers are successfully finding alternative routes to bypass chokepoints in the Persian Gulf. Traders noted that shipping companies are increasingly using onshore pipelines and expanding ship-to-ship transfers off the coast of Oman to avoid potential disruptions in the Strait of Hormuz. These operational workarounds have eased immediate market fears of a complete supply blockage.

ECB Flags Accelerated Inflation Link

Despite the daily price drop, a new study from the European Central Bank (ECB) highlights a more worrying long-term trend. In its Economic Bulletin published Monday, the ECB found that the transmission of wholesale gas price changes to retail consumer prices has significantly accelerated.

Key findings from the ECB study include:

Ad

• In more than half of Eurozone member countries, wholesale price changes now pass through to retail gas prices within 1 to 3 months.
• This is a dramatic shift from 2022, when the pass-through was much slower.
• The share of Eurozone countries with a long transmission lag (13 to 24 months) has plummeted from approximately 40% in 2022 to just 5% today.

The ECB attributes this structural change to post-energy crisis market liberalization, the adoption of more flexible pricing mechanisms, and shorter-term fixed-price contracts for consumers.

Implications for Monetary Policy

The ECB's findings present a significant challenge for policymakers in Frankfurt. Wholesale natural gas prices remain up over 140% compared to a year ago due to regional conflicts and persistent supply disruptions. With Eurozone inflation currently above 3% and some economists forecasting a rise to 4% by year-end, the faster pass-through of energy costs adds further pressure.

This development complicates the decisions facing ECB President Christine Lagarde, particularly after two recent interest rate hikes. However, the report did offer one positive note: the sensitivity of electricity prices to gas price volatility has decreased due to the expanding role of renewable energy in power generation, which has reduced the direct impact of fossil fuels on setting marginal electricity costs.