'Remarkable' drop in gas prices may lead to only small fall in inflation 

'We’re one cold snap away from European natural gas prices rebounding,' cautions economist Neil Shearing 

Sparse snowfall in Lenggries, Germany. Unseasonably warm weather in much of Europe contributed to the drop in wholesale prices as governments built up stockplies of gas. Picture: Sven Hoppe

The recent “collapse” in wholesale gas prices will not automatically lead to a significant slowing in consumer price inflation, though it will likely give more room for governments to decide over continuing subsidies for households and business energy bills, a leading economics consultancy has said.

Capital Economics said government energy subsidies had helped stop the full effects of soaring gas costs pushing up consumer prices across Europe, and the drop in wholesale gas prices will have a less dramatic effect on consumer prices as a result.

The “collapse” in wholesale gas prices in recent weeks has been “remarkable”, Capital Economics group chief economist Neil Shearing said in a commentary. He said: 

Lower natural gas prices will help the fight against inflation in Europe, but the impact on [consumer inflation] might be smaller than one might have expected given the drop in wholesale prices.

The price of European wholesale gas rose 7% to €74.80 per megawatt hour yesterday, Monday, but was still trading back around the levels of mid-February last year, before Russia launched its invasion of Ukraine.

In August, wholesale gas had reached as high as €343 per MW hour on fears that Europe would run out of the fuel this winter.

Ireland’s annual inflation was running at 8.2% in December, which compares with the 9.2% rate for the eurozone as a whole.

Gas is a key fuel in generating power on the Irish grid when the wind doesn’t blow. The prices Irish generators and large manufacturers pay are indirectly influenced by continental European prices, though the bulk of gas supplies come from the North Sea via Britain.

Governments on the continent have scrambled to fill storage facilities to safeguard against shortages.

“The drop in prices has been caused by an extremely mild winter in Europe. Gas in storage normally falls over the winter months but this year it has actually risen”, Mr Shearing said.

“What happens next will depend to a large degree on the weather in Europe over the rest of this winter, although perhaps we can take comfort from the fact that weather forecasters have a better track record than economic forecasters. 

"Either way, we’re one cold snap away from European natural gas prices rebounding.”