Natural Gas Market Turmoil May Interrupt Slide in UK Inflation

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Britain’s energy price slump is slowing down with traders seeing an increased risk of higher costs this winter and beyond, a possibility that’s likely to harm the Bank of England Governor Andrew Bailey’s effort to rein in inflation.

The huge decline in natural gas and electricity prices this year has helped the UK cut inflation to 7.9% in June from a 41-year high of late last year The Bank of England indicated earlier this month that the rate of inflation could fall by more than half this year, and toward its 2% target by 2024. But rising energy prices would slow down that trajectory.

UK gas costs have dropped more than 40% this year but the market is still fragile. Volatility is rife with intraday prices spiking more than 40% in Britain and Europe last week on fears that supply could be restricted by strikes at a key LNG facility in Australia. The possibility of extended cold weather this winter is also is risk for gas supplies.

Before taking into account future price spikes, the disinflationary effect from energy prices is already set to slow down, according to George Moran, European Economist at Nomura International Plc.

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