- Could surging energy prices raise inflation expectations and spark a self-fulfilling upward price spiral? Futures markets suggest the risk is limited — for now. Sharply rising energy prices have accelerated headline inflation. After oil, gas and coal prices more than doubled in less than a year, spurred by strong supply-demand imbalances and weather-related factors, there are growing concerns that inflation expectations might become increasingly influenced by current price pressures (“de-anchoring”), creating a challenging environment for monetary policy. Yet, futures prices of such commodities are currently in strong “backwardation” (i.e., they are lower than spot prices). Often overlooked, such backwardation suggests that the current energy crisis could be temporary, which may explain why professional long-term inflation expectations have remained relatively well-behaved so far — in contrast to market-implied inflation expectations.
- However, there are emerging signs of de-anchoring inflation expectations if the energy crisis drags on for too long. Given the current uncertainty on the recovery path and inflation outlook, this places a premium on the credibility of central banks and their effective forward guidance to ensure that expectations remain well-anchored to avoid being cornered by markets anticipating possible inflation overshooting.
- The re-opening dynamics of the pandemic generated strong demand-supply imbalances in energy markets, whose price effect has been exacerbated by weather-related factors (read here our latest report).
- In particular, the recent surge of natural gas prices (“gasflation”), and spillover effects to oil and coal, have amplified existing price pressures driven by firming demand and continued supply chain disruptions. While real activity and industrial production (which accounts for about one-third of global natural gas consumption) have been recovering swiftly, the supply side response has been modest, crippled by labor shortages, rising input costs, and delayed investment. At the same time, soaring gas prices prompted substantial switching to the use of coal in power generation in key markets, including in China, Europe and the United States, leading coal prices to their highest level since 2001 (+420% year-over-year), and causing CO2 emission prices to rise (as energy producers cover the higher emission intensity). They have also pushed up prices for crude oil as a substitute for heating and power generation. While gas is still 19% below its year-to-date peak, crude oil continues to reach new record YTD highs. A cold winter could make the situation worse, with the combination of low inventories and supply-chain disruptions pushing prices up further.
Energy prices & inflation
Backwardation keeps inflation expectations anchored
Contact
Eric Barthalon
Allianz SE
Allianz SE
Patrick Krizan
Allianz SE
Allianz SE