Jan von Gerich highlights that Eurozone inflation risks remain skewed to the upside due to a persistent energy shock linked to Middle East tensions. Even under milder energy scenarios, he stresses that supply chain disruptions, higher production costs and firm-level price adjustments are already embedded, leaving the ECB unconvinced that inflation will quickly return to target.

Persistent energy shock sustains risks

"All members viewed the risks surrounding the inflation outlook as being to the upside relative to the staff baseline projections, with the evolution of the conflict in the Middle East being the key source of risk."

"With the energy shock proving more persistent than had been envisaged at the time of the March and April meetings, and indirect effects starting to become increasingly visible and broad-based, the inflation outlook had deteriorated further."

"Looking ahead, it was cautioned that even a sustainable resolution to the conflict in the Middle East would not necessarily mean an end to the shock."

"Even under a milder scenario with less elevated energy prices – which might emerge if the conflict was resolved promptly and sustainably – a significant portion of the inflationary damage from the shock would already have worked its way into the broader economy."

"In particular, supply chain disruptions, higher production costs and firm-level price adjustments would not simply or quickly reverse with the resolution of the conflict."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)