Europe's Energy Crisis Fuels Inflation and ECB Policy Concerns

Rising energy prices are fueling inflation pressure in Europe as tensions in the Middle East heighten risks to energy supplies.

The European Central Bank's (ECB) policy outlook is being complicated by the renewed inflation pressure, with the bank facing a difficult balancing act between containing inflation and avoiding a recession in the event of an energy supply shock.

International oil prices climbed to six-week highs on Thursday amid escalating tensions in the Middle East and concerns over possible disruptions to energy shipments through the Strait of Hormuz. Brent crude briefly rose above 97 US dollars a barrel before giving up some of its gains, while West Texas Intermediate (WTI) crude climbed to nearly 93 dollars a barrel.

The impact of higher energy costs is already visible in Europe's latest inflation data, with annual inflation in the eurozone expected to rise to 3.3 percent in August from 2.9 percent in July. Energy prices rose 14.3 percent year on year, accelerating from a 10.3-percent increase in July and recording the fastest growth among the main inflation components.