Global inflation alarms sound again as the energy shock intensifies, putting central banks in a dilemma
- Senior economists at the European Central Bank pointed out on Wednesday that the current inflation shock facing the Eurozone is not necessarily milder than in 2022. Last month's inflation rate jumped to 3.2%, far exceeding the 2% target. The situation in Iran has pushed up energy prices, and part of the increase is being transmitted from the services sector to broader areas of the economy.
- A slight interest rate hike later this month is almost certain, but few expect aggressive tightening to follow. This is because household demand remains sluggish, the labor market is turning weaker, and both fiscal and monetary policies are tighter now than at the onset of the last shock. All these factors limit the possibility of a rapid rise in inflation.
- However, this shock is characterized by a more pronounced global nature, increasing the risk of nonlinear amplification—if its scale, scope, or duration exceeds current expectations, the indirect impact of the global shock on inflation will be even greater. Cost pressures will accumulate more broadly along the global value chain, resulting in larger increases in import prices and a stronger transmission of energy price shocks to the domestic economy.
- Meanwhile, households may adapt more quickly to a high-inflation environment, and governments in various countries have less fiscal space to cushion rising prices. This means the European Central Bank faces even more complex trade-offs than in 2022 when responding to a new round of global energy price shocks.
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