Lessons from 2021 to 2023: Inflation management calls for a sustainable energy transition in Europe

Since 2021, Europe has known a period of high inflation. Breaking off decades of accommodating monetary policy designed to raise inflation to its 2% target, the European Central Bank (ECB) raised interest rates throughout 2022 and 2023 in the hope of bringing down inflation that was not forecasted to get back below target any time soon.

In this note, we look at how gas demand and renewable energy deployment have an impact on inflation. To do so, we explore the link between the EU’s fossil fuel dependency and inflation during the 2021-2023 period, building on EU energy data – electricity and gas demand and prices – and on inflation data – Harmonized Indices of Consumer Prices or HICP and HICP energy (see the information on data sources).

We show that gas prices are a major driver of electricity prices, and a reduced reliance on gas contributes to lower and less volatile electricity prices. In turn, lower and less volatile electricity prices contribute to lower and less volatile energy inflation and facilitate overall inflation management.