Rate Hikes Ahead: Markets Predict ECB and Fed Action Amid Energy Crisis Fears

European Central Bank President Christine Lagarde recently stated that policymakers are not seeing higher energy prices spilling over into broader inflation or wages. According to Bert Colijn, service-sector pricing plans look broadly unchanged, and wage growth expectations in the UK have actually fallen since February.

Falling producer and farm-gate prices suggest that food inflation will continue to ease. While this may take time, labour markets are cooler, fiscal policy is less supportive, and the backdrop is much less conducive to a catastrophic inflation wave.

Despite this, financial markets have nailed on September rate hikes for the ECB and the Federal Reserve. The answer lies in what might happen if the energy crisis worsens. Warren Patterson suggests that oil prices could go back to $120/bbl if the Strait of Hormuz stays blocked through August and Red Sea shipping comes under greater threat.

Natural gas prices are reaching fresh highs, too. Gas storage levels are worryingly low, and Europe is competing with Asia for scarce Liquified Natural Gas (LNG) supplies. Warren warns that prices could go higher from here.