Europe's Inflation Fears Driven by Natural Gas, Not Oil

• European natural gas prices have reached a five-month high.
• Europe is facing increased competition from Asia for LNG supplies.
• Current European gas storage levels are at 63%, significantly below historical averages.
• High natural gas prices are driving up inflation and bond yields in the UK and Germany.
• The European Central Bank is expected to raise interest rates in September.

Soaring energy prices have rekindled inflation fears in Europe, with policymakers and bond markets more concerned about the jump in natural gas prices than crude oil futures. European benchmark natural gas prices have hit a five-month high as the region scrambles for LNG supply to fill storage sites ahead of winter. The crisis in the Middle East and increased competition from Asia have coincided with Europe's efforts to build natural gas inventories, leading to current storage levels of approximately 63%. This is the lowest for this time of year in nearly two decades and well below the five-year average. The surge in gas prices threatens to further elevate inflation and prompt interest rate hikes beyond current expectations. In response, yields on key UK and German bonds have surged to multi-decade highs. Jamie Searle, European rates strategist at Citigroup, noted that natural gas prices are now the primary driver of yields, a sentiment echoed by Emma Moriarty, portfolio manager at CG Asset Management, who stated that natural gas prices continue to rise and have not recovered despite ceasefires. Higher energy prices have already boosted inflation in both the UK and the Eurozone, with July figures accelerating from the previous month and year-over-year. The European Central Bank, which previously raised rates in June, is widely expected to implement another hike in September, though further increases are not anticipated.