The direct effects of more expensive energy can already be seen in inflation, indirectly in the costs of companies. Firms also indicate a growing willingness to reflect increased costs in final prices. However, the second round of the inflationary shock only begins when the behavior of people and companies changes, while the information available so far they do not show the transmission of the energy shock to wages and long-term inflation expectations. Analysts of the National Bank of Slovakia (NBS) pointed this out in their current commentary.
- The direct effects of more expensive energies are already increasing inflation and the costs of businesses.
- The conflict in the Middle East caused a significant and longer-term global energy shock.
- April inflation in the eurozone reached three percent, energy grew the fastest.
- Short-term inflation expectations have risen significantly, but long-term inflation expectations remain relatively anchored.
- Financial markets are already predicting at least one increase in interest rates this year.
According to them, a short-term and moderate increase in the price of oil or gas will usually increase inflation only temporarily, and this effect will fade over time. However, it is now clear that the economic consequences of the conflict in the Middle East are significant and will have a longer duration. A long-lasting major energy shock is dangerous for the economy, analysts warned.
“The consequences of an energy shock in the economy can be manifested in several places and with different intensity. More expensive oil increases the prices of fuels, transport and petrochemical inputs. Gas affects electricity prices, industrial costs and chemical production. Shortages in the supply of fertilizers can later affect food through increased costs for farmers,” the economists added. This is also consistent with April’s data, when overall inflation in the eurozone rose to 3% and energy prices were its fastest growing component.
However, according to analysts, the risk for inflation would increase significantly if the current development began to be gradually reflected in the expectations for the next years. Firms could more often and to a greater extent transfer increased costs to final prices, and households, in turn, could demand higher wages as compensation for rising living costs. “However, the data so far do not indicate that this scenario is being fulfilled. The growth of prices in services is not accelerating, a new wave of general salary increases is not visible in the development of wages, and core inflation is stable. Thus, the situation does not yet resemble a return to the previous energy shock after the Russian attack on Ukraine in 2022“, the economists assessed.
According to them, however, the results of surveys among companies and households indicate that inflationary pressures may intensify in the coming months. While long-term inflation expectations remain anchored, short-term ones have visibly jumped. In the survey of the European Central Bank (ECB) among households, inflation expected for one year increased from 2.5% to 4%, and inflation assumptions for three years also increased significantly.
“Companies are increasingly counting on the fact that increased costs will translate into prices for customers. Another factor that can increase inflationary pressures are problems in supply chains, which according to companies, they are already starting to show. The effort to pre-stock can further strengthen their negative impact on inflation,” NBS analysts stated.
According to them, the situation is thus more serious than in the ECB’s March basic scenario, but it still does not mean a return to 2022. “Available data do not yet suggest that the energy shock will take root in wages, pricing and longer-term expectations,” they added. However, financial markets already expect the central bank to raise interest rates at least once this year.
