LONDON—Another dramatic spike in natural gas prices appears to have ended any hopes that Europe’s inflation battle is set to ease, with financial markets now bracing for higher prices, a faster pace of interest rate hikes, and a deeper economic downturn.
Just a few weeks ago, signs that inflation in the United States—which tends to lead world economic shifts —might be peaking boosted stocks and lowered government borrowing costs. Investors bet central banks would now pay more attention to slowing economies, with a peak in the rate-hiking cycle nearing.
Instead, this week began with a forecast from U.S. bank Citi that UK inflation would rocket to a near half-century high of 18.6 percent by January, a prediction that dominated British newspaper front pages on Tuesday.
That landed as another explosive rise in natural gas prices showed little sign of slowing, with Russia signaling further squeezes on exports and European buyers scrambling for supplies before winter.
Gas prices have surged almost 40 percent in August and nearly 300 percent this year.
“The key is energy, energy, energy. There is an energy crisis, let’s be honest about that, electricity prices are 10 times pre-COVID levels, that is a shock to the system,” said Thomas Costerg, senior economist at Pictet Wealth Management.
“The U.S. and Europe are on different paths. We all knew that the Achilles’ heel of Europe is foreign energy and now they are paying the price for that,” he said, referring to European reliance on Russian gas.
