Economic inflation rears its unwelcome presence.
In the year 2025, the global economy is grappling with the significant and multifaceted impact of energy and commodity prices, particularly natural gas, on inflation rates.
The American Consumer Price Index rose by 5.4% compared to the previous year in June, reflecting the persistent influence of energy costs on consumer prices. This trend is mirrored in Germany, where the consumer price index climbed by 3.8% in the same month.
One of the key drivers of this inflationary pressure is the surge in natural gas demand, despite falling crude oil prices. This surge in demand supports firm energy prices in the natural gas sector, contributing to inflation persistence around 3% in the U.S., complicating the Federal Reserve’s monetary policy decisions.
Energy prices, broadly speaking, influence inflation because they are a major component of consumer prices and production expenses. However, despite overall U.S. energy prices falling year-on-year for six consecutive months, down 1.6% in July, the rise in natural gas demand and prices is offsetting these decreases, putting pressure on consumer costs.
Natural gas prices, currently elevated by demand, may stay volatile. High natural gas prices can raise costs for electricity and heating, directly impacting consumers and indirectly raising goods and food prices due to higher production costs.
The energy transition, shifting from fossil fuels to renewables, presents a complex picture. While it aims to reduce this volatility and dependency, the transition involves upfront investments, infrastructure upgrades, and potential supply chain disruptions, which could keep energy prices and thus consumer costs elevated temporarily or longer term.
However, over the long term, renewables may reduce reliance on volatile fossil fuel markets, potentially stabilizing or lowering consumer energy costs. This depends on technology, policy, and market developments.
Meanwhile, the supply of fossil fuels is decreasing faster than demand, leading to higher prices. The price of coal has tripled in recent times, and oil prices are also rising sharply. Wholesale electricity prices are climbing, and German ten-year government bonds have a negative yield of 0.5%.
Central banks attribute the current inflation to temporary factors such as base effects, consumption and investment backlogs after the pandemic, and temporary supply bottlenecks. The markets have shown trust in this explanation, as yields on bond markets have fallen significantly, inflation expectations have decreased, and the gold price has dropped.
However, the end of extremely low inflation rates is being welcomed by central banks and governments, as negative real interest rates lead to a reduction in public debt.
In conclusion, while the energy transition aims to reduce the volatility and dependency on fossil fuels, it may cause elevated consumer costs during the transition period due to infrastructure and market adjustments. This evolving landscape means inflation could remain above central bank targets in the medium term, impacting consumer prices for energy and related goods and services.
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