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Energy Prices · Eurozone Economy · Geopolitics · Inflation
European Central Bank Chief Economist Philip Lane has issued a stark warning that a protracted US-Israeli war with Iran could significantly elevate euro-zone inflation and impede economic growth, primarily through disruptions to energy supplies.
Recent escalations in the Middle East have already pushed oil prices up by over 10%. Lane emphasized that while an immediate jump in energy prices would exert upward pressure on inflation and negatively impact economic activity, the ultimate scale and implications for medium-term inflation depend on the conflict's duration and breadth.
Previous ECB analyses indicate that a persistent drop in energy supplies could lead to a 'substantial spike' in energy-driven inflation and a 'sharp drop' in output. Specifically, a permanent oil price spike of the current magnitude might lift inflation by 0.5 percentage points and reduce growth by 0.1 percentage points.
Despite these warnings, euro-zone inflation currently stands at 1.7%, below the ECB's 2% target. The ECB typically tends to look past short-term energy-induced price volatility unless it impacts longer-term expectations or triggers second-round effects on underlying inflation.
For now, market-based longer-term inflation expectations and the ECB's 2% deposit rate outlook remain stable for the year.
