Weekly Brief: Energy Prices Are Surging And Stagflation Is Knocking

Weekly Brief: Energy Prices Are Surging And Stagflation Is Knocking

over 2 years ago3 mins

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You might be on hold for a while: energy prices have been soaring this year on the back of the post-pandemic recovery, and they’re finally starting to take a toll on the global economy…

🕰 Recap

  • The price of carbon allowances in Europe has almost doubled this year
  • That, combined with rising natural gas prices, pushed the cost of power in the continent to record highs earlier this month
  • Soaring energy prices are synonymous with inflation, which may be why UK inflation hit a nine-year high in August
  • What’s more, rising energy prices are also forcing some manufacturers to shut down their factories

✍️ Connecting The Dots

Natural gas – which is responsible for more than a fifth of the European Union’s (the EU’s) electricity generation – has seen its price triple in Europe and the UK this year. The fuel is contending with both higher demand and a supply crunch: storage sites are currently holding their lowest levels for this time of year in more than a decade, and natural gas producers are scrambling to refill them in time for the more heating-intensive winter months.

But electricity is hard to store in bulk, which means big swings in fuel costs translate quickly into big swings in price. And when a significant portion of electricity comes from unpredictable wind and solar generation, that price volatility is higher still. So it’s no surprise to see natural gas and power prices breaking records day after day this month, prompting several governments to step in to cushion the impact on consumer’s electricity and gas bills. Higher bills, after all, will bite into consumers’ wallets at a time when many are still struggling from both higher food prices and the pandemic’s economic fallout.

But it’s not just households that are feeling the effects of higher energy prices: two major fertilizer makers were forced to shut down some of their factories this week due to soaring costs, which could be a sign of what's to come for manufacturers. Throw in supply chain issues and mounting raw material costs, and the economic recovery in Europe is suddenly looking a lot less stable…

🥡 Takeaways

1. Stagflation fears are on the rise.

High energy prices are synonymous with inflation, since they push up costs that end up being passed on to customers. And now that they’re also starting to threaten economic growth, they’re stoking concerns over stagflation, where elevated price pressures combine with a slowing economic recovery. That poses a tricky conundrum for central banks that on one hand implement economy-boosting measures if growth is falling, but on the other tend to withdraw those measures if inflation is running too hot.

2. The EU might want to rethink its clean energy policies.

The EU’s push toward renewable energy is one of the drivers of price volatility, while its push to limit carbon emissions is one of the drivers of price inflation. See, power plants that burn fossil fuels have to pay a price – one they pass on to customers – for every metric ton of carbon they emit. That price has almost doubled this year, hitting a record-high last week. So there’s a risk that the resulting inflationary surge will prompt a backlash against measures to curb emissions. So far, though, the EU seems determined to expand renewable power with the goal of making cheap green energy more available.

🎯 Also On Our Radar

The thematic exchange-traded funds (ETFs) run by Cathie Wood’s ARK Invest Management have attracted billions of dollars in new client money in the last few years. And now Goldman Sachs wants a piece of the action: the investment bank’s asset management arm just launched an actively managed thematic ETF focused on emerging technology companies, including chipmakers, software companies, financial technology firms, and cyber security groups.

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