ECB Blames Energy Prices for Recent Inflation Spike

The European Central Bank (ECB) says that the recent spike in inflation is largely due to higher energy prices, justifying its small interest rate hike in June. According to new ECB research, the current bout of high inflation has been driven almost entirely by adverse energy supply shocks.

The researchers compared the current spell of high inflation with the one following Russia's invasion of Ukraine in 2022, using variables such as pandemic-related demand and supply imbalances, energy supply shocks, fiscal and monetary policy measures. The study found that the current increase in headline inflation has been driven largely by higher energy prices.

The ECB raised interest rates for the first time in nearly three years in June, and is set to do so again next week as gas and petrol prices remain elevated in the euro zone due to continued disruption to the Strait of Hormuz.