European Economy Braces for Higher Inflation Rates as Oil Prices Rise

The European economy is bracing for higher inflation rates in September, driven by rising oil and gas prices. The energy component of the Consumer Price Index (CPI) has contributed significantly to the increase in headline inflation, with a 1.6 percentage point gain since February.

According to Continuum Economics, the current economic backdrop differs significantly from that of four years ago when the European Central Bank (ECB) hiked interest rates more forcefully. Back then, inflation was already high and climbing even before the start of the war in Ukraine, while unemployment was low and supply chains faced significant bottlenecks.

The ECB is concerned about second-round effects, where an initial oil shock feeds into the wage-setting process, pricing decisions, and inflation expectations. However, the transmission from higher inflation to higher wages is not automatic and will depend on labor market conditions.