ECB: Futures Curves Suggest Energy Inflation to Decline in 2023, But Uncertainty Very High
21 June 2022
By David Barwick – FRANKFURT (Econostream) – Futures curves indicate that energy inflation should subside next year, but any scenario is subject to great uncertainty, the European Central Bank said on Tuesday.
In a pre-release from the fourth economic bulletin of 2022, due out Thursday, the ECB wrote that major oil price rises last year would exert downward pressure on annual energy inflation in January, March, July, October and November of this year.
‘Cumulatively, downward base effects will take more than 20 percentage points off energy inflation by December 2022 compared with December 2021’, the ECB said. ‘Of course, inflation outcomes will also depend on developments in actual energy prices in 2022; so far the downward base effects in 2022 have been offset by marked month-on-month increases in energy prices.’
The macroeconomic projections published quarterly by the ECB extrapolate oil and gas prices from average futures prices in the two weeks before each projection cut-off date, the ECB noted.
‘Currently, futures curves are pointing to a drop in oil and gas prices in the course of 2022 and 2023, implying that HICP energy inflation should decline in 2023’, the ECB said. ‘However, recent energy price developments and the related volatility of futures curves are a reminder of the uncertainty regarding their predictive capacity, and hence regarding energy inflation projections.’
‘Geopolitical developments continue to imply high unpredictability in energy markets’, the ECB said. ‘This is reinforced by ongoing endeavours to make European energy markets independent of Russian energy supplies.’
Moreover, the climate transition could be associated with more price volatility ahead, while carbon taxes could add upside price pressures, the ECB said.
‘However, an increasing decarbonisation of the energy system and increasing energy efficiency also imply reduced dependence of euro area consumer energy prices on global commodity prices and increased dependence on cheaper renewable energy, which in the long run could have a downward impact on consumer energy prices’, the ECB said.