TELF AG analyzes the Impact of Wholesale Gas Prices on Inflation, Food Prices, and the EU Economy in the First Semester of 2023

The wholesale gas prices

In the first half of the year, the world witnessed a rollercoaster ride in energy markets, with wholesale gas prices in Europe experiencing a significant drop in February. This drop has brought hope to the ongoing cost of living crisis fueled by the energy crisis. However, the interconnected web of economic forces and global supply chains dictates that the impact of these price fluctuations will take time to manifest across various economic sectors fully.

The Energy Crisis Unraveled

Europe’s energy crisis was fueled by many factors, including geopolitical tensions, supply chain disruptions, and unexpectedly high energy demand. However, the drop in wholesale gas prices was attributed to various factors. One key aspect is the substantial inventory of natural gas, coal, and other fuels accumulated in the preceding year, cushioning the immediate impact of supply shortages. Reduced industrial consumption of natural gas during this period, compounded by a milder winter, further contributed to the easing of prices.

Impact on Inflation and Food Prices

The energy crisis undoubtedly triggered a cost of living crisis when rising energy costs rippled through various sectors of the economy. The drop in wholesale gas prices had the potential to alleviate some of these inflationary pressures, but it’s essential to recognize the time lag involved. While lower energy costs could eventually lead to decreased food prices, this transition always takes time due to the intricate global supply chain.

Experts estimate that consumers usually begin to experience the effects of falling food prices within approximately six months, assuming energy prices stabilize. The lag effect is a crucial factor in this phenomenon, as the time required for raw materials to traverse the supply chain, undergo processing, and eventually reach consumers’ plates cannot be underestimated. This highlights the complexity of the interconnected global economy, where a reduction in energy prices doesn’t necessarily lead to an immediate decrease in the cost of living.

Navigating Economic Challenges

While the drop in energy prices potentially cushioned Europe from the brink of a recession, the road to recovery remained fraught with challenges. The lingering impact of supply chain disruptions, geopolitical tensions, and trade-related uncertainties continues to shadow economic activities. The recovery process is expected to be slow and arduous, as these factors impede growth.

Central banks have taken action to combat inflation, and their efforts are projected to yield results by the end of the year. However, the journey toward significant deflation remains to be determined, and the pace of wage growth is expected to lag behind the recent surge in inflation. Elevated interest rates, intended to curb inflation, might inadvertently pressure mortgage costs, further constraining consumers’ disposable income.

In conclusion, the decline in wholesale gas prices in Europe offered a glimmer of hope in the face of the ongoing energy crisis and its repercussions on the cost of living. However, the complexities of the global supply chain and the intricate interplay between various economic factors mean that the effects of these price fluctuations will take time to permeate through different sectors. While the worst energy crisis might have passed, the European economy still grapples with multifaceted challenges that could impede a swift recovery. Consumers might have to brace themselves for low growth amid persistent above-average inflation while resolving the cost of living crisis unfolds gradually.