IEEJ：January © IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (567)January 14, 2022

Energy Price Hikes behind Creeping Inflation Fears
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe future course of the global economy recovering from the COVID-19 crisis has
become a matter of concern due to various destabilizing factors. The first such factor is how therapid spread of new Omicron variant infections would affect the world and the global economy. TheOmicron shock that hit the world late last November has led to the spread of COVID-19 infections at
an amazingly high speed in the world, with no sign of an end to the spread. In Japan, the daily
number of new COVID-19 infections dramatically increased from a 100-200 range in the middle ofDecember to more than 18,000 on January 13. In the United States, the daily number topped one
million earlier this year. Major European countries have announced record daily numbers of newCOVID-19 infections one after another. The entire world has been shaken by the rapid spread ofOmicron infections. While there is a view that Omicron is less likely to cause severe illness thanDelta, the new COVID-19 variant has the potential to seriously affect the global economy dependingon the future spread or deterioration of infections.
In addition, another new risk factor of concern is emerging for the global economy. That iscreeping inflation fears. Over the past 10-odd years, a key challenge for the global economy has
been not inflation fears but deflation fears, or how to achieve economic growth or pursue economic
expansion under deflationary pressure. In any country, inflation has generally been the mostimportant alarming issue for economic and monetary policy authorities. In the real world as
described above, however, strategies to break away from deflation and achieve economic growth
have remained the economic policy pillar. Particularly, countries have remarkably mobilized all
possible fiscal and monetary policies to overcome the global depression following the global
financial crisis and the unprecedented economic contraction under the COVID-19 crisis.
Recently, however, inflation rates have risen remarkably in major countries. In Japan thathas long been plagued with deflationary pressure, last November’s consumer price index, excluding
perishables prices, scored a 0.5% year-on-year increase. Excluding special factors including mobilephone rate drops achieved by a policy initiative by the previous Suga administration, however, theCPI posted a rise of around 2%. In the United States, last December’s CPI was announced as scoringa 7.0% year-on-year rise. Similar trends have been seen in Europe. Last November’s CPI for themember countries of the Organization for Economic Cooperation and Development recorded a 5.8%
rise, the highest in 25 years. In this way, inflation is becoming a keyword for the global economy. In
the United States and Europe, therefore, monetary authorities are exploring an exit from monetaryeasing implemented for an economic recovery from the COVID-19 crisis.
Why have inflation fears loomed at this time? Various factors have been combined behindthe fears. First, various supply side constraints amid a demand recovery from the COVID-19 crisis
have pushed up costs, leading to price hikes. Particularly, global supply chain confusion andbottlenecks have caused semiconductor shortages and distribution troubles regarding various goods.
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Labor shortages have also emerged. In the United States and some other countries, wages have risen
to secure workers, contributing to price and cost hikes. Food price hikes through bad or abnormal
weather have also been cited as an inflation factor.
Among various inflation factors, however, the most attention-attracting one in the world isenergy price spikes since last year. As energy is a basic good for all economic activities, energy pricehikes lead to higher costs. If they are passed on to final consumption prices, upside pressure on
consumer prices rises inevitably.
Among energy prices, crude oil prices attract the most attention regarding global economic
impacts. Prices of crude oil that is the biggest energy source and the most internationally tradedcommodity represent one of the important economic variables that exert great influence on theglobal economy. Crude oil price hikes affect civic life and cause a general price increase throughpetroleum products price rises and exert great influence on other energy prices susceptible to oil
price changes. Crude oil prices retained an uptrend throughout last year, hitting the year’s high above$86 per barrel for Brent last November. Brent fell back below $70/bbl on a U.S.-coordinated oil
reserve release, the spread of Omicron variant infections and a decision by the OPEC-plus group ofoil-producing countries in December to increase production as planned earlier. However, Brent roseback later, topping $80/bbl again. On January 13, it reached $84.67/bbl.
Not only crude oil prices increased substantially. European natural gas prices, Asian LNG
spot prices, steam coal prices and electricity prices also posted sharp increases last year. Theseenergy price hikes are dominantly cited as a key factor behind the recent general price increase. Asenergy is indispensable for economic activities, stable energy supply at stable prices is extremely
important in energy policy. If energy price hikes become a key factor behind a general price increase,
the hikes will be a key challenge for economic and monetary policies. In this way, energy price hikes
have loomed as the world’s key issue from the policy viewpoint. Countermeasures against the hikes
are now required along with energy market and price stabilization measures.
The current energy price hikes have basically and directly been triggered by the tightening
supply-demand balance in each energy market. Concerns about winter cold waves, supply
interruptions triggered by unpredictable events and geopolitical destabilization have also contributed
to energy price hikes. Unless investment to maintain or expand supply capacity for each energy
source makes progress in response to growing energy demand, however, the supply-demand balance
may remain tight, leading energy prices to stay high. In such case, energy price hikes may become astructural factor to accelerate inflation.
There is another matter of concern. The enhancement of environmental protection anddecarbonization initiatives is now expected to push up energy costs, causing a so-called “greeninflation.” For instance, the enhancement of decarbonization initiatives would discourage fossil fuelinvestment required for meeting demand, contributing to tightening the fossil fuel supply-demandbalance structurally. While fossil fuels continue to play a key role during a long transition to
decarbonization, their prices would rise substantially. As demand expands rapidly for various
resources and rare minerals required for promoting renewable energy and electrification under
decarbonization initiatives, their costs would also increase sharply amid their widening
supply-demand gap. The concentration of these resources and production capacity in some countries
and relevant geopolitical risks could also push up their prices. In this way, we may have to keep inmind price hikes caused not only by the current tightening of the supply-demand balance but also by2

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the future structural tightening.
Since the two oil crises in the 1970s, energy price hikes have not become any grave global
issue linked to inflation. However, we will have to closely watch future energy price changes andtheir impacts on the global economy with great interest.
Contact: report@tky.ieej.or.jp
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