A key European Central Bank (ECB) official has sent a clear message that the end of a war does not necessarily mean the end of its economic shockwaves.
ECB Governing Council member Gabriel Makhlouf recently emphasized that even if the conflict subsides, the inflationary pressures it created could linger. The latest data seems to support his caution. In May, the Euro area's headline inflation (HICP) re-accelerated to 3.2%, driven by a sharp 10.9% year-over-year rise in energy prices and sticky services inflation at 3.5%. This shows that the direct impact of the energy crisis is still very much present.
To understand this situation, we need to look at the causal chain. First, the geopolitical conflict involving Iran and the disruption in the Strait of Hormuz caused a significant spike in oil and gas prices in March. Although prices have since eased on ceasefire talks, energy market experts, including the International Energy Agency (IEA), warn that the supply situation remains fragile. The IEA has even signaled a potential market 'red zone' this summer if key shipping lanes don't fully reopen.
Second, this initial energy price shock is rippling through the economy. It directly affects fuel and utility bills for consumers and businesses. More importantly, it contributes to persistent inflation in the services sector, as businesses pass on higher energy and transportation costs. This pass-through effect is a key reason why inflation may not cool down as quickly as hoped.
Third, the ECB is carefully watching for 'second-round effects,' which occur if higher inflation leads to demands for higher wages, creating a wage-price spiral. For now, wage growth appears stable, which is a positive sign. However, Makhlouf's comments underscore the ECB's vigilance. They are committed to a meeting-by-meeting, data-dependent approach, ready to act if the inflation shock proves more persistent than anticipated.
- Glossary:
- HICP (Harmonised Index of Consumer Prices): The primary measure of inflation in the Euro area, used by the ECB to guide its monetary policy. It's designed to be comparable across all EU countries.
- Second-round effects: An economic phenomenon where an initial price shock (like an oil price hike) leads to a secondary wave of price increases, often driven by workers demanding higher wages to compensate for the higher cost of living.
- Red zone: A term used here by the IEA to describe a period of high risk and instability in the energy markets, where supply buffers are thin and prices could spike.