ECB Executive Board member says US-Iran war increases inflation risk, suggests possibility of rate hike

The proportion of European manufacturing companies planning price increases is rising rapidly. Despite weak demand, the share of companies in the Eurozone planning to raise prices continues to grow, while households have also raised their inflation expectations. If the energy price shock expands further, monetary policy will need to tighten to contain the risk of secondary effects that threaten medium-term price stability. This risk has increased in recent weeks. As businesses and households respond to surging oil prices and supply bottlenecks, the risk of rising inflation in the Eurozone has grown. The transmission of fuel price surges to the economy could be faster than during the last inflation wave in 2021-22, as “memories of that painful inflation episode remain vivid.” This supports the possibility that the European Central Bank could raise rates as early as June to address the chain reaction of the US-Iran war on Eurozone consumer prices, given the region’s heavy reliance on imported fuel.