The European Central Bank (ECB) has highlighted that higher energy prices are the primary drivers of inflation in the euro area, as noted by economists Kristina Barauskaitė Griškevičienė and Claus Brand. They explain that the current energy supply shock, influenced by factors like the ongoing war in the Middle East and disruptions in the Strait of Hormuz, significantly differs from previous episodes of inflation.
Key points from their analysis include:
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Energy Supply Shock: During the January-May 2026 period, adverse energy supply factors were responsible for about 90% of the increase in energy inflation, with minimal influence from monetary and fiscal policies.
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Delayed Rate Hikes: Following the outbreak of war in the Middle East, the ECB initially refrained from raising interest rates, making its first increase in June 2026 to combat inflation.
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Inflation Projections: Despite the ECB’s optimistic scenarios, inflation was not anticipated to return to the target of 2% before 2027.
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Expected Rate Increase: With inflation rising to 3.3% in August 2026, the ECB is expected to raise rates again in September.
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Gradual Monetary Response: The current monetary policy response is characterized as gradual compared to the forceful measures taken during the 2021-22 inflation surge, which was driven by a mix of both supply and demand-side factors.
Overall, the ECB’s approach and the inflation landscape exhibit notable differences compared to previous challenges, particularly concerning the role and impact of energy prices.
