Euro area: Energy risks reshape ECB outlook – Nordea

Nordea analysts Tuuli Koivu and Anders Svendsen say Euro area headline and core inflation stayed close to the ECB target in February, leaving the broader outlook largely unchanged. However, they stress that higher Oil and gas prices linked to conflict in the Middle East could significantly lift Euro-area inflation and trigger ECB repricing if the shock proves persistent.

Energy shock risk to ECB inflation path

"The flash estimates for Euro-area inflation in February did not alter the overall view of price pressures in the economic zone. Headline inflation at 1.9% and core inflation at 2.4% were close to the levels seen in previous months as well as the ECB’s target even if above expectations. However, if the conflict in the Middle East continues and price pressures begin to accumulate not only in the energy sector but more broadly across global supply chains, the inflation outlook may become much more interesting from the central bank’s perspective."

"It is way too early to know how the war in the Middle East will evolve and to what extent and for how long it will add upward pressure to the global energy prices. If the shock is short-lived and supply chains recover in a couple of weeks’ time, we tend to think that the impact on the Euro-area inflation remains limited and there is no reason for the ECB to start rethinking its monetary policy stance."

"However, given that the war has already escalated and US President Trump expects it to continue for at least a month, the price fluctuations may turn out to be more permanent than in a number of previous episodes. In that case, the impact on Euro-area headline inflation could of course be significant at least in a short term. But even in that case, it is far from certain how the ECB sees the price pressures to run through the economy and whether the price pressures stemming from energy are strong enough to cause another inflation cycle as it did in 2022. It is also good to keep in mind that in EURs, energy prices are not that much higher than a year ago so that the impact on the annual inflation numbers is still moderate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)