Yves here. Today we offer mini-tour d’horizon of the impact of the immediate energy crisis in Europe and Asia (an analysis of Asia by Satyajit Das is forthcoming). As the students see it is possible, the reduction of European supply and the resulting increase in prices comes on top of the Russian-energy sanctions and the resulting inflation and industrial displacement.
Through this study, this article shows that policymakers see the ECB’s rate hike as the first line of defense, where all central banks can do is to kill demand in a dim way, as opposed to discouraging consumption and directing assets to critical sectors.
I hope that students in the region can recognize the kind of price increases they are seeing, as the higher price force spreads to other products quickly. For example, a friend in Slovenia says that food costs have increased by 10% in four months. That will not be the result of a lack of fertilizer, as the impact of reduced planting this spring will not be seen until harvest time.
By Tsvetana Paraskova, an energy and commodities journalist who has contributed to Oilprice.com for nearly a decade, covering global energy markets, commodities, and the political and economic developments that shape supply and demand. Previously, he worked as a reporter and editor for financial and business news organizations, including iNVEZZ and SeeNews. Originally published at OilPrice
- The war-driven increase in oil and gas prices is driving up inflation and slowing economic growth in the EU and the Eurozone.
- Unlike the 2022 crisis, Europe is less vulnerable due to lower fossil fuel dependence, increased renewable energy, and reduced energy consumption.
- Rising energy costs pushed Eurozone inflation to its highest level since 2023, strengthening expectations that the European Central Bank will raise interest rates.
The European Union and the Eurozone are feeling the shock of energy as the war with Iran enters its fourth month.
Rising oil and gas prices amid the Middle East crisis are pushing up inflation and weighing on economic growth expectations in the EU and the Eurozone, which is facing its second energy crisis in four years.
Comparisons of inflation and gas supply shocks in 2022 after Russia’s invasion of Ukraine are flawed as conditions are different and the likelihood of runaway inflation is low, analysts and economists say.
Nevertheless, the European Commission and the European Central Bank (ECB) chose to act at the beginning of this period in terms of adjusting the monetary response and policy, even if the current price shock is still seen as passing.
The European Commission, the EU’s governing body, is considering giving EU member states more flexibility in implementing energy-related measures outside the financial framework, sources with knowledge of the talks told Bloomberg this week.
The EC is considering a plan to allow EU member states to spend 0.3% of GDP on energy-related measures outside the EU financial framework as European countries struggle to contain energy price shocks.
The current energy crisis is different from the shock of 2022 when Europe loses one third of its pipeline gas. In this regard, the EU has reduced its dependence on fossil fuels, both through the expansion of renewable energy, which weakens the transition from electricity to electricity prices and a significant reduction in energy consumption by industry and households, said the European Commission in its Economic Forecast for Spring 2026 last month. Related: Strait of Hormuz May Reopen, But System Already Broken
In this forecast, the Commission expects GDP growth in the EU to slow to 1.1% this year, down from 1.5% in 2025, and 0.3 percentage points lower than expected in the Autumn 2025 Forecast. Inflation is expected to increase to 3.1%, which is an upward revision of a full percentage point compared to the Autumn 2025 forecast.
“The conflict in the Middle East has caused a major energy shock. The EU must learn from past crises: maintain temporary and targeted support, protect public finances, reduce dependence on imported oil, and speed up reforms,” said Valdis Dombrovskis, Commissioner for Economy and Production.
The Commission noted in its spring forecast that “In response to the high rate of inflation, the ECB and other central banks of the EU are expected to tighten their monetary policy stance or, at least, delay the easing measures previously expected.”
An ECB rate hike is certain when the bank’s Governing Council meets in Frankfurt next week, as inflation in the Eurozone rose in May to the highest annual rate since September 2023, analysts said.
Annual inflation in the Euro is expected to be 3.2% in May 2026, from 3.0% in April, a flash estimate from Eurostat, the statistical office of the European Union, showed on Tuesday.
Energy is expected to have the highest annual rate in May at 10.9%, compared to 10.8% in April, followed by services (3.5%, up from 3.0% in April).
Inflation numbers strengthen the case for an ECB rate hike at the June 11 meeting, even if a small increase of 0.25 percent would be a kind of ‘insurance’ hike to show the ECB’s determination to keep inflation expectations steady, ING analysts said.
“Given the experience of 2022, the ECB may opt for an ‘insurance’ rate hike. Not that the rate hike will do much to affect inflation expectations, but it would be a symbolic move, underlining the ECB’s willingness to act,” said Carsten Brzeski, Global Head of Macro at ING.
“Even if the war in the Middle East were to end tomorrow, the damage of inflation has already been done. Inflation has started – and will continue – to hit the euro economy,” said Brzeski.
“The only question is whether it will fall into the ‘slow’ category or whether disruptions to the supply chain will have more severe consequences than ‘only’ on travel and food costs.”
