ECB: Over 80% of Y/Y Energy Inflation Rise Since February Due to Base Effect

6 May 2021

By David Barwick – FRANKFURT (Econostream) – The surge in energy inflation over the last few months was due almost entirely to a base effect that contributed about one percentage point to headline euro area HICP, the European Central Bank said on Thursday.

In a contribution to its third economic bulletin of the year, the ECB noted that whereas annual energy inflation in the euro area had been -6.9% last December, as of March it was already at 4.3% (since which it has further increased to an estimated 10.3% in April).

That led to a marked rise in overall euro area HICP, which went from -0.3% on the year in December to 1.3% in March (and an estimated 1.6% in April).

On the one hand, the ECB observed, energy inflation tends to be driven by higher oil prices, which pass through faster and more fully than electricity, gas and other energy goods. However, base effects from early 2020 have also played a role, the bulletin said.

Even if prices for personal transportation fuels had remained until now as depressed as they were in the immediate aftermath of the pandemic’s onset, current annual rates of change would still mathematically reflect the disappearance from the index of that crash, the ECB said.

According to the ECB, almost ten percentage points of the 12-point increase in energy inflation from -1.7% in February to 10.3% in April 2021 was due to that base effect. That in turn boosted headline inflation by around one point.

‘This impact will remain in the data for most of the year’, the bulletin said.

In addition to the base effect, higher oil prices have also contributed to higher energy and thus headline inflation. The monthly increase in January 2021 was particularly strong and would cause a downward base effect on energy inflation of about four percentage points and on headline inflation of about 0.4 point in January of next year.

‘The outcome for energy inflation and the extent to which it conforms with the March 2021 ECB staff macroeconomic projections for the euro area will naturally depend on whether oil prices move in line with the path of oil futures prices assumed in these projections and many other factors that can have an impact on energy prices over time’, the bulletin said. ‘However, the size of the base effects can be estimated for the period of 12 months after the latest available inflation outcome and provide some indication as to likely broad directional movements.’

The ECB noted that various administrative measures, especially the reversal of the German VAT reduction, also contributed to faster energy inflation starting early this year. These measures have boosted annual energy inflation by about 0.8 point, but after this year will disappear and then ‘reinforce the downward impact of oil price-related base effects in early 2022’, the ECB said.

However, that effect is minimal compared to that of oil price changes, it added.

The ECB’s latest staff projections reflected all this to an extent that ‘can already be gauged quantitatively when base effects, one-off tax impacts, climate package measures in Germany and current oil futures prices are considered’, the ECB said.