ECB Links Euro Zone Inflation to Energy Prices

The European Central Bank (ECB) has attributed the recent spike in euro zone inflation to higher energy prices, justifying its decision to raise interest rates for the first time in nearly three years in June.

A new ECB research blog post compared the current period of high inflation with the one that followed Russia's invasion of Ukraine in 2022, using variables such as pandemic-related demand and supply imbalances, adverse energy supply shocks, fiscal policy measures, and monetary policy responses.

The researchers found that the current increase in headline inflation has been driven almost entirely by adverse energy supply shocks. In contrast, the 2021-22 bout of high inflation was also influenced by initial monetary stimulus and later fiscal stimulus.

This contrast supports the ECB's more measured policy response so far, according to the research. The ECB is set to raise interest rates again next week due to continued disruption in the Strait of Hormuz keeping gas and petrol prices elevated.