The ongoing conflict in the Middle East, particularly involving Iran, is expected to have a lasting impact on global inflation, according to Philip Lane, the chief economist of the European Central Bank (ECB). Speaking at a conference in Tokyo, Lane emphasized that the energy shock resulting from the conflict could keep prices elevated, even if a swift resolution is reached.
Energy Shock and Inflation
Historically, oil prices have tended to stabilize after initial spikes. However, Lane noted that the current situation might differ due to countries restocking inventories and diversifying their energy sources. “We had an overnight, fairly quick and big decline in global oil supply, which has been masked until now by inventories,” Lane explained.
He further elaborated that while the initial energy shock might reverse, the secondary effects on inflation could persist. This has led financial markets to anticipate two hikes in the ECB’s 2% deposit rate, with a potential third hike being considered over the next year. Economists, however, are more cautious, predicting two hikes followed by a rate cut in mid-2027, according to a Reuters poll.
Policy Lessons and Central Bank Strategy
Lane highlighted that past energy shocks offer policy lessons, particularly regarding the abrupt rise in inflation due to increased energy costs. He stressed the importance of central banks acknowledging substantial shocks and their potential inflationary impacts while avoiding overreactions in monetary policy settings.
“You have to be skillful in terms of looking at monetary transmission, consumer confidence, and all these different mechanisms,” Lane stated. He also emphasized the need for central banks to prevent persistent beliefs among the population or price-setting sectors that inflation will remain excessively high.
While some inflationary pressures from supply shocks may subside over time, Lane underscored the importance of maintaining consumer confidence and ensuring that inflation expectations remain anchored.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
