Policymakers stress that the risk of inflation ripping is smaller now than in 2022, when world supply chains were still recovering from the pandemic, and when consumers had built up savings that allowed them to splash out. The economy today looks weaker: job growth in the U.S. has virtually ground to a halt and the European Central Bank is warning that the eurozone labor market is weaker than a record low jobless rate of 6.1 percent would suggest. In the U.K., unemployment has been rising for over a year.
Central banks “shouldn’t be too worried about wage-price spirals, despite the endless overshoot” in inflation, said TS Lombard analyst Dario Perkins on X. “But my worry is that it tips labor markets over — and that risk is bigger than in 2022.”
Either way, financial markets are quickly losing hope for a swift resolution. They are now pricing in a bigger and longer supply shock, after a weekend that saw massive attacks on energy installations, and reports suggesting that President Donald Trump has softened his opposition to ‘U.S. boots on the ground’ in Iran. Signals of defiance from the Islamic Republic, with the nomination of Mojtaba Khamenei to take over as Supreme Leader from his assassinated father, also suggested that the conflict will last longer than a few weeks.
The economy today looks weaker: job growth in the U.S. has virtually ground to a halt and the European Central Bank is warning that the eurozone labor market is weaker than a record low jobless rate of 6.1 percent would suggest. | Spencer Platt/Getty Images
Interest rate futures now suggest about a 70 percent probability of the ECB having to raise its key interest rates by half a percent this year, having expected no change at all in 2025 on the eve of the conflict. A first hike is expected by July. Meanwhile, money markets assign roughly a 50 percent chance of a Bank of England rate increase by year‑end. Last week, investors still had their money on a cut.
As recently as Friday, ECB board member Isabel Schnabel said that while geopolitical volatility posed upside risks to inflation and warranted vigilance from policymakers, the ECB could ‘look through’ short-term volatility in inflation stemming from the war.
However, she also warned that it “must carefully monitor the persistence of the energy price shock, its impact on inflation expectations and any indication that firms start passing through higher input costs to their customers.”
