ECB Insight: Uptick in Energy Should Be Sharper, More Persistent to Trigger Greater Concern

13 February 2025

By Marta Vilar – MADRID (Econostream) – With the trauma of the last energy crisis still fresh, the latest price spike for such commodities has European Central Bank Governing Council members vigilant but not yet overly concerned about its implications for inflation.

Energy prices in the Eurozone were up 2.9% on a monthly basis in January, according to Eurostat’s flash CPI estimate released on February 3. That was a significant increase compared to readings well below 1% in previous months.

However, ECB officials in conversations with Econostream have stuck to the idea that risks to inflation are two-sided and not shown a readiness based on the energy price surge to attach greater weight to upside risks.

One of them argued that energy price volatility was normal, so that it would take greater persistence or a further acceleration of developments to date for the ECB to worry more.

Another Eurosystem insider, yet more relaxed, suggested that this episode was likely to prove transitory and that countries would simply replenish their gas reservoirs during the summer.

Gas had become less important in the European energy mix than at the time of the last energy crisis, and the current economic situation suggested very limited room for second-round inflation effects, he said.

Despite not appearing overly concerned, many Governing Council members have mentioned higher energy prices in their recent public remarks, calling it an upside risk to inflation.

In a recent interview, Executive Board member Piero Cipollone called for prudence mainly due to the increase in energy prices, but also acknowledged that the spike could be short-lived.

‘It might be a transitory phenomenon, but prices have risen substantially’, he added.

Chief Economist Philip Lane drew attention to the price surge in a recent speech, describing it as ‘noticeable’ but downplaying its upside inflation potential, highlighting instead ‘welcome indications of deceleration of services inflation’.

The expected increase in headline inflation in the next few months would be due mainly to energy-related base effects, according to ECB Vice President Luis de Guindos earlier this month. He nonetheless made clear that this uptick would be temporary as inflation ‘will start to decelerate later on in the spring’.

On the more hawkish side, Central Bank of Ireland Governor Gabriel Makhlouf said on January 31 that ‘[r]ecent movements in energy prices, especially for gas, will warrant vigilance.’

Erring on the side of caution, policymakers have started publicly warning about the potential upside effect of energy prices on inflation. However, with significant second-round effects not anticipated, there remain scant signs for now that the ECB is preoccupied with more expensive energy.