What is causing prices to rise in Europe?

This year – what was supposed to be the year of recovery – is ending on a rather bitter note with Omicron crossing our ways and most notably prices constantly rising. Be it in the supermarket, at the petrol station, at the mall, or the hairdresser – life has simply gotten more expensive. Especially now during winter time where we all want to heat our homes, the look at the gas and electricity bill is likely to give ice-cold shivers. 

The reason behind rising costs in Europe is the basic law of supply and demand. While our economy is reopening fast with high demand for goods especially microchips as well as petrol and diesel an imbalance between demand and supply is caused by a shortage in supply for example of shipping containers. This imbalance and the consequential high prices will stabilise after companies are catching up with their production. US President Joe Biden’s recent move to release ample oil from national reserves also gives hope to an ease of the pressure on prices. 

More pressing is that natural gas and energy prices are soaring with gas prices surging to a record high. Generally, a large part of companies’ and people’s costs relate to energy. The increase in the prices of gas and electricity prices will then automatically be passed down to the paying retail consumers. 

The surge can be explained by an imbalance of demand of supply, whose factors are as diverse as to be expected in a globalized world.

Demand for natural gas has increased due to the global economic rebound from coronavirus shutdowns combined with the issue of stocks left low and were not replenished in summer after a long cold winter in Europe in which consumers needed more gas to heat their homes. There is also an increasing gas demand in residential heating due to cold winter and working remotely and in power generation due to a switch from coal to gas caused by rallying EU carbon prices

The rise in electricity prices can be explained by two main reasons: On the one hand, there is an 80% rise this year in prices for carbon emissions permits as the European Union ups its climate ambitions for 2030. And on the other hand, there are knock-on effects from more expensive coal and gas used to generate power.

Gas prices could remain high until the winter heating season is over, due to low levels of natural gas in European storage facilities. European gas markets are not nearly out of the freezing cold woods yet. They could face further stress tests from unplanned outages and sharp cold spells, especially if they occur late in winter. In addition, there is the Nord Stream 2 problem where Russia is being accused of holding back gas until regulators give a green light to begin operating the pipeline to Germany. In Asia, although the pressure on gas is generally lower, given the Beijing Winter Olympics in February the demand for LNG will most likely remain strong having a knock-on effect on European prices once again. 

In conclusion, even though governments are intervening on electricity prices or considering doing so, one has to spend more on Christmas presents, feeding the family on Christmas Eve, and most importantly keeping the warm festive spirit alive by heating the house. Christmas this year will once again look different with a slimmer wallet in your pockets and not to forget the COVID-Grinch at the other side of the dinner table. 

Nevertheless, let us all enjoy the festive atmosphere in Malta, wander through the wonderfully decorated streets in Valletta and visit the giant Ferris wheel next to the Triton fountain. PKF Malta sends out Season’s Greetings to all readers!