The energy bill returns to the heart of European inflation

The rebound in wholesale gas and crude prices over the past few weeks has put energy back at the centre of the European inflation debate. After almost two years of steady declines, Dutch TTF and Brent have both recovered ground at the same time, and that coincidence is what concerns analysts most: when both markets rise together, the pass-through to consumer prices tends to be faster and broader.

The question facing central banks and industry is not whether the shock will transmit, but how quickly, and how much of it companies can still absorb.

How the shock transmits

The energy pass-through mechanism runs through three stages, each with its own lag. First, wholesale costs raise input costs for energy-intensive sectors — chemicals, ceramics, metals, logistics. Those costs then filter into industrial producer prices, typically with a one- to three-month lag. Finally, part of the increase reaches the end consumer, particularly in goods and services where the energy component of cost is hard to hide, such as transport or processed food.

What is distinctive about this episode is that all three stages are compressing. According to the pass-through index QuintAxis tracks internally, the speed at which wholesale costs move into industrial prices has picked up relative to the three-year average — a pattern that has historically preceded increases in core goods inflation.

Industry has less room to absorb than in 2022

Unlike the 2022 shock, when many European companies could absorb part of the cost increase thanks to margins still comfortable after the post-pandemic recovery, the starting point today is different. Two years of pressure on labour and financing costs have eroded that buffer. Recent purchasing managers' index (PMI) surveys already show a growing share of industrial firms signalling they intend to pass any new energy cost increase into selling prices rather than absorb it.

European industry's room to absorb an energy shock is now noticeably smaller than it was two years ago.

The dilemma this creates for the ECB

This context directly complicates the last mile of disinflation the European Central Bank has been pursuing since 2023. A sustained energy rebound would delay the convergence of core inflation toward the 2% target, just as markets begin pricing in further rate cuts. We analyse that dilemma in more depth in our piece on the ECB's autumn.

What to watch

• TTF winter contracts: European storage fill levels and the origin of LNG imports will determine whether the price rise is transitory or becomes entrenched.
• OPEC+ decisions: any quota adjustment at upcoming meetings will alter Brent's trajectory.
• Producer price PMIs: the prices-charged subcomponent is the earliest signal of pass-through into industry.
• ECB accounts: language on upward inflation risks will be the signal to watch ahead of the next meeting.

The current episode is not yet an energy crisis on the scale of 2022, but it is a reminder that European disinflation remains more fragile than the headlines suggest.

Sources

• Eurostat, Harmonised Index of Consumer Prices (HICP)
• ICE Futures Europe, TTF natural gas contracts
• European Central Bank, monetary policy accounts