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Examining the impact of natural gas price volatility on Euro zone inflation expectations

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  • Chibane, Messaoud
  • Kuhanathan, Ano

Abstract

Recent literature has identified a strong link between EURO zone inflation and the price of natural gas prices, establishing itself after the Russian-Ukraine war. We revisit this relationship by analyzing the probability of extreme movements in market-based inflation expectations and its relation to energy prices. We find that, after 2022, short-term and long-term expected inflation upward tail risk tend to increase jointly, pointing to a potential de-anchoring effect. This effect is not as pronounced for the downward tail risk. This phenomenon seems to be specific to the EURO zone and related to natural gas prices rather than to energy prices in general. Our results suggest that beyond monetary policy, solving natural gas supply issues and limiting price volatility should be key targets for the EURO zone policy makers in order to rein in inflation expectations.

Suggested Citation

  • Chibane, Messaoud & Kuhanathan, Ano, 2025. "Examining the impact of natural gas price volatility on Euro zone inflation expectations," The Quarterly Review of Economics and Finance, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:quaeco:v:104:y:2025:i:c:s1062976925001036
    DOI: 10.1016/j.qref.2025.102062
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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