By Paul Hannon
The global nature of the rise in energy prices that has accompanied the conflict in the Middle East may lead to slower growth and higher inflation in the eurozone than had the impact been more contained, the European Central Bank's chief economist said Wednesday.
The latest jump in oil and natural-gas prices triggered by a war has drawn comparisons with the aftermath of Russia's invasion of Ukraine in 2022.
Most economists see the likely impact on eurozone inflation this time around as more limited, since natural-gas prices have risen less sharply, the labor market is looser, and the economy is cooler.
However, ECB Chief Economist Philip Lane said that work undertaken by the ECB's economists suggest the global nature of the shock may increase its impact.
In 2022, Europe was the focus of higher energy prices as its supplies of natural gas from Russia fell sharply. But in 2026, economies in Asia are at the forefront, since the imports a larger share of their energy needs through the Strait of Hormuz, which remains largely blocked.
They produce many of the inputs and finished goods consumed in Europe, and businesses may increase their prices to cover higher energy costs.
"A global shock means that costs are increasing around the world," Lane said in a speech delivered in London. "This creates a compounding effect where the final price of a good reflects not just the direct increase in the local energy price but the cumulated effects of price increases across international suppliers."
As a result of its global nature, he said that while the impact on the eurozone of the current energy shock may be more contained than in 2022, "it may be stronger and faster compared to historical averages."
The international aspect of the shock adds to a range of factors that make its likely impact on growth and inflation in the eurozone difficult to estimate.
Recent indicators suggest the immediate impact on inflation has been "relatively contained," Lane said, while wage negotiations have yet to reflect the increase in energy prices.
But it is still possible that the rise in energy prices will trigger higher wage demands and other second-round effects that will require the ECB to raise its key interest rate.
"Clearly, determining the appropriate monetary policy stance under these complex conditions is a judgment call," Lane said.
The ECB left its key interest rate at 2% in April, and next decides policy in June. Investors expect the central bank to raise its key interest rate a number of times this year.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
05-13-26 1538ET
