Supply pressures resurface in Eurozone
Energy-driven supply shocks push Eurozone inflation higher, prompting expected ECB rate hikes despite weak demand.
We expect the Iran war-induced supply shock to exert increasing upward pressure on underlying inflation as rising import prices and supply chain stress feed through. A silver lining is that the shock is arriving against a relatively benign backdrop of soft supply pressures pre-war. Subdued consumer demand, particularly for goods, will also dampen the scale of passthrough.
A range of leading indicators corroborate this. Commodity prices have surged, inflation expectations have risen sharply, and higher input costs are already feeding into producer prices. Demand destruction won’t be sufficient to dampen price pressures as firms have little space to absorb rising prices in margins.
Our measure of imported inflation supports our view that the ECB won’t look through the temporary surge in energy prices. We anticipate two rate hikes in June and July to keep inflation expectations anchored and stem second-round effects. A resolution of the conflict would tilt the balance of risks towards fewer hikes.
