BlackRock Investment Institute

Macro insights

Mar 07, 2022

Energy prices driving inflation

Rising energy prices have been the main driver of euro area inflation over the last 12 months –and the Russia-Ukraine conflict now exacerbates this. See the green band in the chart. We estimate last week’s spike in oil and gas prices could add materially to euro area headline inflation over 2022. The impact in the U.S. is likely to be smaller as it is significantly less reliant on energy from the region. Combine this with an additional hit to agricultural and intermediate supplies – like palladium and car parts – and the conflict is adding to the supply shock that was already in train.

Central bank dilemma

Chart showing energy as being the key driver of euro area inflation

Sources: BlackRock Investment Institute, with data from Haver Analytics, March 2022. Notes: the chart shows the contribution of different goods and services to headline inflation in the euro area. The bars denote percentage point contributions to headline inflation.

Supply-driven inflation makes life difficult for central banks: aggressive rate hikes will do nothing to curb the pass-through of higher energy prices. Either they accept higher inflation or destroy economic activity to contain it. That’s why we believe – even more now – that central banks will go ahead with cautiously removing the pandemic stimulus that’s no longer needed, but will not go further to squeeze out inflation. We already see markets adjusting their expectations to reflect this reduced likelihood of aggressive hiking, especially in the euro area.

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Elga Bartsch
Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Nicholas Fawcett
Macro Research

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