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Inflation driven by energy prices

14 Jan 2022
Subject Energodigest
Categories Oil Gas

With the holiday season now over, we would like to start off the New Year by discussing the top trending topics in the last eventful two weeks. Inflation continued to dominate the macroeconomic headlines. It hit a 25-year high in OECD countries in November, rising to 5.8% y-o-y from 5.2% in October.1 Prices in Europe climbed 4.9% that month compared with a 4.1% increase the previous month; in the US prices were 6.8% higher in November after rising 6.2% a month earlier. The world’s leading economy2 has seen inflation hit 7.0% (a record level since 1982),3 according to fresh data for December.

Inflation has been driven primarily by energy prices (see Fig. 1). Prices soared 27.7% in OECD countries in November (24.3% in October) in the steepest rise since June 1980.4 In addition, food prices increased 5.5% y-o-y in the same period (4.6% y-o-y the previous month)5. The trend is expected to continue in the early part of this year. Oil prices have been rising in the first weeks of 2022, with Brent nearing the upper limit of the $80-85 range (for the first time since late November). There is no end in sight to astronomical natural gas prices. Spot prices at the TTF in the Netherlands, the most liquid natural gas market, are above $1,000/mcm (after setting a new record of about $2,200/mcm in late December), driving up electricity prices in Europe (for instance, Germany’s electricity rates are more than four times higher than in mid-January 20216) and producer price inflation.

While most experts believe that, because of low natural gas storage inventories (less than 55% full), gas prices will remain high throughout 2022 (but lower than the current prices, see Fig. 2), changes in US monetary policy may slow prices for oil, a higher-liquidity commodity. The Fed has already indicated that it will tighten its policy, while investors are looking forward to the first increase (of four possible in 20227) in the near-zero rate in March (see Fig. 3) so they can start disposing of risky assets. But since natural gas and electricity have a greater impact on overall energy costs than liquid hydrocarbons, stabilization of the natural gas market and Europe’s embrace of nuclear power are key to cost reduction.

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