Soaring energy prices have revived inflation worries across Europe since the Iran war disrupted oil and gas flows, but policymakers and bond markets appear to be focusing more on natural gas than on crude oil futures.

European benchmark natural gas prices have climbed to a five-month high in recent days as Europe races to secure LNG supplies to refill storage sites before winter. Since the Middle East crisis began, Europe has been losing the contest with Asia for spot LNG cargoes as prices surge in the absence of most Qatari LNG term volumes.

The Iran war, together with stronger competition from Asia, has arrived at a critical time for Europe, which is trying to build gas inventories during the spring and summer for the next winter season. That matters because gas is a direct input into household heating, industrial production and electricity costs, making it a more immediate inflation driver for much of the region than crude oil, which is more globally traded and more evenly absorbed across sectors.

Current storage levels are around 63% full, according to data from Gas Infrastructure Europe. That is the lowest level for this time of year in nearly two decades and well below the five-year average.

The jump in gas prices could push inflation higher and force interest rate increases beyond current expectations. In European bond markets, yields on key UK and German government bonds have risen to multi-decade highs amid concern that stubborn inflation will persist because of the increase in natural gas prices.

“Natural gas prices have taken over as the key driver of yields,” Jamie Searle, European rates strategist at Citigroup, told Bloomberg.

Emma Moriarty, portfolio manager at CG Asset Management, said, “The natural gas price is more relevant to the UK and Europe and never really recovered in any of the ceasefires and continues to leg higher.”

Higher energy prices have already lifted inflation in both the UK and the eurozone, with July prices accelerating from the previous month and rising from a year earlier. For central bankers, the timing is awkward: energy costs are moving at the same time policymakers are trying to judge how far inflation pressure has already filtered into the broader economy.

The European Central Bank, which in June raised key interest rates for the euro area for the first time since 2023, is widely expected to announce another rate hike in September, but then stop increasing rates after that.