Unchecked Price Increases Make Their Appearance
Markets have shown trust in the explanations given by central banks, as yields on bond markets have fallen significantly. This trust is partly due to the central banks' handling of the ongoing energy price volatility and the complex energy transition.
The current impact of rising energy and commodity prices on inflation is mixed but shows signs of moderation in 2025. Energy prices, particularly crude oil, have been volatile due to geopolitical tensions but have generally declined in the latter half of 2025. Inflation rates in the US, influenced by factors including energy prices, have been increasing mildly, but energy costs showed a small decrease in July 2025.
Crude oil prices experienced volatility in the second quarter of 2025 amid geopolitical tensions in the Middle East, causing some price spikes. However, prices declined toward the end of the quarter and are forecast to continue falling. Brent crude oil is expected to average around $58 per barrel in late 2025 and decline further in early 2026 due to production increases by OPEC+ and higher US oil output.
This easing of energy prices has helped moderate inflation somewhat. The US energy index fell 1.1% in July 2025, and gasoline prices decreased 2.2% over the month. Despite this, inflation as measured by the US Consumer Price Index (CPI) rose by 2.8% year-over-year in July 2025, the highest since February 2025. This rise partly reflects other supply chain and cost pressures, including import duties and rising prices in other categories like household goods and used cars.
The ongoing energy transition adds complexity to the situation. Investment and policy shifts toward renewable energy can temporarily push commodity prices higher due to demand for materials and infrastructure changes. However, longer-term expectations are for energy cost stabilization or decline as renewable sources replace more volatile fossil fuels.
The transition may create short-term price volatility in commodities but is expected to mitigate long-term inflation risks from fossil fuel price shocks. The current forecasts showing a decline in fossil fuel prices reflect production adjustments and geopolitical developments but do not yet fully capture the effects of the energy transition on inflation trajectories.
Meanwhile, the price of coal has tripled in recent times, and the supply of fossil fuels is expected to decrease much faster than demand, leading to rising prices. This situation is expected to normalize again in a few months.
Central banks and governments may welcome the end of the phase of extremely low inflation rates. However, the consumer is expected to foot the bill for the energy transition, with electricity prices for wholesale customers climbing. A separate CO2 emissions trading system for residential buildings and traffic is planned, which will increase the cost of fuel and heating.
German government bonds with a ten-year maturity have a negative yield of 0.5 percent, and ten-year T-Bonds now yield only 1.19 percent. A change in the extremely expansionary monetary policy is not required, according to central banks, who have characterized the current inflation development as temporary.
The American Consumer Price Index rose by 5.4 percent compared to the previous year in June, and the German consumer price index climbed by 3.8 percent compared to the previous year in June. Despite these high inflation rates, there is no sign of relief in commodity prices, and stringent climate goals are hindering the exploration of new fossil fuel reserves.
Natural gas, which produces fewer pollutants than coal, could be an ideal substitute until the expanded use of alternative energies can meet the growing demand for electricity. As the energy transition continues, it is crucial to monitor inflation trends and adjust policies accordingly to ensure a stable economic environment for all.
- In the context of the ongoing energy transition, it might be prudent for individuals to consider investing in renewable energy stocks, as the long-term expectations indicate energy cost stabilization or decline due to the increased use of renewable sources.
- With central banks anticipating a decline in fossil fuel prices and governments planning for a CO2 emissions trading system, one may want to re-evaluate their insurance coverage, potentially altering policies to account for the expected increase in fuel and heating costs, especially for residential buildings and traffic.
