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While much of the attention since the Iran conflict has focused on oil prices, Europe's natural gas market may pose just as big a threat to the Irish economy. Wholesale gas prices have climbed back close to their March peak and directly determine most household’s utility bills and much of Ireland’s electricity prices. Combined with unusually low gas storage levels across Europe, the risk is that another cold winter triggers a fresh spike in prices, pushing inflation higher, squeezing household incomes and delaying the recovery well into 2027.
Why natural gas could be the next inflation problem
Most of the headlines surrounding the Iran conflict have focused on oil prices because they are more volatile and feed through quickly to petrol prices. However, natural gas arguably matters just as much for Irish households. Utility bills account for around 4.1% of household spending, a similar amount to the 4.3% spent on motor fuels and heating oil. That matters because wholesale gas prices in the UK, where Ireland imports around 80% of its gas from, have rebounded to 145.51p/therm from 96.5p/therm immediately after the US-Iran ceasefire in June, which means energy bills are likely to rise over the rest of 2026 and into the first few months of next year.
As a rule of thumb, a sustained 10% increase in wholesale gas prices eventually adds around 0.1-0.15 percentage points to CPI inflation. On that basis, the roughly 75% increase in gas prices over the past year could add around 0.9ppts to inflation. That said, there are long lags between rising wholesale prices and the impact on household bills which means price rises would need to be passed on relatively quickly for the impact to materialise all at once. In any case, rising utility bills are a key reason that we think inflation will remain sticky through 2027, averaging around 2.5%.
The biggest reason prices remain elevated is continued disruption to liquefied natural gas (LNG) shipments from Qatar, which supplies around one-fifth of global LNG exports. Ireland, which has no domestic gas storage or LNG terminals, relies on pipeline imports from the UK, which includes LNG injections. The UK imported just 24.1TWh of LNG during the first two months of the conflict, compared with a ten-year average of 36.3TWh. What’s more, a scorching summer has pushed up demand to meet increased air conditioning usage, June was the hottest on record in England and fourth hottest in Ireland which prompted gas demand to surge 8.6% and 7.7% y/y respectively.
The combination of constrained supply and higher demand has left European gas storage just over half full and at its ten-year minimum as our chart below shows. Stocks are even more depleted in the UK where gas storage is only around a quarter full, compared to a long-run average of 56%.
History suggests the biggest risks may still lie ahead. Following Russia's invasion of Ukraine, wholesale gas prices did not peak until around six months later and remained elevated for much of the following year. We are unlikely to see a repeat of the extraordinary price spikes of 2022 because Qatar is a much smaller supplier than Russia was. Nevertheless, a prolonged disruption would probably keep prices moving steadily higher.
The immediate risk is continued hot weather in Europe that further drains stocks. El Niño, officially declared last month, increases the likelihood of hotter summers that put additional strain on electricity systems. Nuclear power stations rely on cool river water for cooling, while hydroelectric output can fall as reservoirs dry up. During the latest heatwave France temporarily shut around 6% of its nuclear capacity because river temperatures became too high. In many countries that lost generation would be replaced by gas-fired power stations, further increasing gas demand.
Even if summer temperatures return to normal, with storage levels already unusually low, a spell of cold weather could rapidly deplete inventories and force European countries back into the spot market to secure additional supplies. That would intensify competition for LNG cargoes and push wholesale prices sharply higher in the autumn.
The bigger concern is not today's gas prices but how little margin for error Europe has heading into winter. Storage levels are unusually low, supplies remain constrained and demand is already elevated. That combination leaves the market highly vulnerable to any further disruption or a colder-than-average winter.
If wholesale gas prices were to surge again, Irish inflation could climb back above 4% and remain elevated throughout much of 2027. That would squeeze real household incomes and force the ECB to hike interest rates which would dampen growth. It would also force the government to step in with more generous energy supports as they did earlier this year when the spike in oil prices prompted diesel and petrol prices to surge, which may blow a hole in other spending plans in the upcoming budget as the government tries to moderate spending growth to around 6% per year from an average of 9.4% over 2019-2024.
