European Inflation Spikes in January Amidst Soaring Energy Prices

The landfall facilities of the 'Nord Stream 2' gas pipline are pictured in Lubmin, northern Germany, Tuesday, Feb. 15, 2022. Nord Stream 2 is a 1,230-kilometer-long (764-mile-long) natural gas pipeline under the Baltic Sea, running from Russia to Germany's Baltic coast. AP Photo/Michael Sohn

The rate of inflation in the euro area* increased in January, driven by a surge in energy prices, with the ongoing Russia–Ukraine conflict threatening to drive it up even further.

For the first month of 2022, the annual inflation rate was 5.1 percent, up from 5 percent in December, according to a Feb. 23 report (pdf) published by Eurostat, the statistical office of the European Union. The inflation rate for January 2021 was only 0.9 percent. The annual inflation rate in the European Union was 5.6 percent in January 2022, up from 5.3 percent in December 2021 and 1.2 percent in January last year.

“In January, the highest contribution to the annual euro area inflation rate came from energy (+2.80 percentage points, pp), followed by services (+0.98 pp), food, alcohol & tobacco (+0.77 pp) and non-energy industrial goods (+0.56 pp),” the report said.

Countries that saw the highest annual inflation rate were Lithuania with 12.3 percent, Estonia at 11 percent, and Czechia with 8.8 percent. France saw the lowest rate of inflation at 3.3 percent, followed by Portugal with 3.4 percent, and Sweden with 3.9 percent. When compared to December 2021, inflation in January rose in 19 member states and fell in eight.

The report comes just as Russia has invaded Ukraine. Multiple cities in Ukraine, including the capital city Kyiv, have reported explosions. Russia is calling the offensive a “special military operation,” while Ukrainian president Volodymyr Zelensky has announced martial law throughout the country.

The invasion has had a massive effect on oil prices, pushing it past the $100 per barrel level. In early trade on Thursday, Brent crude broke through its September 2014 high. U.S. West Texas Intermediate (WTI) crude futures broke through the peak set in August 2014.

Russia, the second-largest oil producer in the world, accounts for roughly 35 percent of Europe’s natural gas supplies. As such, any action against Moscow has the potential to spike oil and gas prices worldwide, with Europe being especially affected.

The United States, European Union, UK, and Japan have all introduced new sanctions against Russia following its military action against Ukraine.

“German Chancellor Olaf Scholz has issued an order to halt the process of certifying the Nord Stream 2 gas pipeline. Well. Welcome to the brave new world where Europeans are very soon going to pay €2.000 for 1.000 cubic meters of natural gas!” Dmitry Medvedev, Russia’s former president and now deputy chairman of its Security Council, said in a Feb. 22 tweet, suggesting that prices might soon double.

One factor that might help to temporarily put a brake on rising energy prices could be a resolution to the Iran nuclear deal, Jeffrey Halley, senior market analyst at OANDA, said to Reuters. However, concerns about Ukraine and its “wider ramifications” will continue to “support oil prices,” he added while suggesting investors \buy oil on dips.

*The euro area consists of Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia, and Finland.