Eurozone: Energy shock risks for inflation – Rabobank

Rabobank’s Bas van Geffen says renewed US-Iran hostilities have shifted Eurozone inflation risks upward. June’s softer-than-expected flash estimate may buy the ECB time in July, but the earlier decline in energy prices has reversed, pointing to firmer inflation readings ahead.

Balance of risks shifts higher again

"The conflict has since flared up again, eliminating the more benign scenario – a near-term ceasefire or peace deal. So, we would argue that this tilts the balance of risks towards higher inflation again. President Lagarde may mention this balance of risks in her press conference to underscore that the ECB remains attentive to the developments in the Middle East and energy markets, but we don’t expect her to provide much more guidance for the path ahead."

"Of course, that could change rapidly if the US fails to secure shipping lanes in the Strait of Hormuz, or if more energy infrastructure in the region gets damaged. Upside risks also follow from capacity constraints at refineries, after Ukraine successfully attacked Russian facilities. Even then, it would still require a substantial increase in energy prices to reach the severe scenario."

"Meanwhile, inflation data were better than expected, including softer services inflation. That may buy the ECB some time this month. However, the June print was affected by the sharp decline in energy prices. This has since reversed, which will probably be reflected in future inflation readings."

"And, while measures of underlying inflation haven’t shifted to a significantly higher range yet, the lower bound of the distribution has started to drift higher. That includes the persistent and common component of inflation – designed to measure persistent inflation, after temporary and idiosyncratic shocks fade."

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