Russia's invasion of Ukraine has sharply interfered with energy and food markets, causing a rapid rise in prices
The annual inflation rate in the 27 European Union countries was 9.8% in July, according to data published by the EU statistical agency on 18 August, while in the 19 member states that use the euro, inflation reached 8.9%. This is the highest inflation rate since 1997, when Eurostat began recording statistics.
The countries most affected by high inflation are Estonia (23.2%), Latvia (21.3%) and Lithuania (20.9%), which have had to replace sanctioned trade goods from the neighbouring country of Russia with EU or overseas imports. The statistical agency, in analysing the factors determining inflation, found that the overall inflation rate in the eurozone was driven primarily by high energy and food prices, contributing 4.02% and 2.08% respectively.
The Russian state gas company Gazprom has reduced supplies to Europe, and exports have fallen by 36.2% this year. This has pushed up gas prices in Europe, and Gazprom recently announced that gas prices could rise by a further 60% this winter.
European countries have agreed to fill existing gas storage facilities to at least 80% of their capacity by 1 November, as they face the threat of rising prices and a possible interruption of Russian gas supplies this winter. EU gas buyers have almost reached this level, but they have had to outbid Asian gas buyers in an attempt to secure scarce liquefied natural gas (LNG) from abroad. Benchmark gas prices at the Dutch TTF gas hub reached 230.05 euros per megawatt-hour, which is ten times higher than a year ago.
Inflation and high energy prices are having a strong impact on European companies and industrial sectors
The economy of Germany – the heart of European industry – stagnated in the second quarter due to rising energy prices and supply chain disruptions, the Ministry of Finance noted in its monthly report for August, published on Friday.
Due to high energy prices, Romania's largest chemical company Chimcomplex was also forced to suspend operations.
In an effort to protect households and businesses from high energy prices, France recently announced an additional expenditure package worth 25 billion euros, which included a cap on gas and electricity prices in the country. Although these measures are expensive, they are considered to be very worthwhile as they allowed the country to maintain a low inflation rate, which is the lowest in Europe – just 6.8%.
International consequences
As Europe drives up prices, gas is becoming too expensive in other parts of the world as well.
At the beginning of the summer, Pakistan failed to secure any liquefied natural gas tenders, and now the country is experiencing power cuts and rising electricity bills because it can no longer secure sufficient quantities of fuel.
Sri Lanka is negotiating a bailout with the International Monetary Fund, as high gas prices triggered widespread public protests that led to the ousting of President Gotabaya Rajapaksa last month. With gas prices expected to remain high in the near future, some significant gas projects in Asia have also been cancelled. Last week, the Bangladeshi government announced the cancellation of two large gas-fired power plants, as campaign groups and researchers in the country continue to advocate for the use of cheaper renewable energy sources.