BNY’s Bob Savage argues that Eurozone stagflation risks are building as energy pressures rise, with headline CPI pushed higher by fuel while core remains contained. He expects the European Central Bank (ECB) to stay cautious and watch second-round effects, and sees aggressive front-end hike pricing in the Eurozone and United Kingdom (UK) as likely to be pared back in a volatile process.

Energy shock, CPI and ECB pricing

"The International Energy Agency’s special briefing for EU finance ministers will likely trigger additional national-level support for motorists and industry. Shortages are not as acute as in the emerging world, and most scenarios point to resilience. However, there are individual products where supply, rather than price, could become critical."

"On the other hand, if households are forced to pull back on demand as well, core inflation may not rise as sharply, which could obviate the need for hikes to restrain economic activity. Consequently, the CPI figures in the week ahead will be essential for an initial read on how inflation dynamics are evolving."

"Core inflation across the Eurozone has been running ahead of headline over the last two years. During the 2022–2023 energy shock, headline inflation was the clear leader, but it dragged core prices higher because the cycle was different: global demand was recovering and households had strong wage bargaining power, which may not exist this time around. "

"Furthermore, markets will need to acknowledge that the ECB could struggle for unanimity in the near term: Governing Council member Muller warned that the central bank “may not need fully visible second-round effects” before acting – a bold call, in our view, without sufficient information."

"Inflation data aside, we expect wage data to carry significant weight in policy decisions in the near term. Due to inflation stabilization before the conflict, this year’s collective bargaining rounds were not expected to register material increases."

"Our bias remains that aggressive pricing of front-end hikes in the U.K. and Eurozone will come off, but the process will likely remain volatile."

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