Supply-Driven Inflation Dominates Euro Area as Energy Prices Surge

Experts at the European Central Bank (ECB) are setting the record straight on inflation in the euro area, attributing it largely to supply-driven forces beyond their control. The rise in energy prices has pushed up inflation, with price expectations among firms significantly higher since the outbreak of war in Iran.

The ECB notes that firms interpret this situation as stable demand-pull pressures, but attribute the rise in prices to the supply side. In particular, cost-push shocks drove up price expectations at the start of the war. Materials supply shortages linked to higher energy prices are causing concern, particularly in energy-intensive sub-sectors such as chemicals, refined petroleum, and paper products.

Unlike previous inflationary spirals driven by a surge in demand, this current rise has been fueled by rising energy prices passing through the production chain. Businesses understand this, with their demand expectations remaining flat while paying increasing attention to inflation risks and inflation itself.