BNY’s Bob Savage highlights growing stagflation risks in the Eurozone as energy pressures intensify, pushing headline CPI higher while core inflation remains contained [1]. The International Energy Agency’s special briefing for EU finance ministers is expected to prompt additional national-level support for motorists and industry, although shortages are not as severe as in emerging markets. However, supply issues for certain products could become critical, and if households reduce demand, core inflation may not rise as sharply, potentially reducing the need for further rate hikes to restrain economic activity [1].
Savage notes that CPI figures in the coming week will be crucial for understanding inflation dynamics, as core inflation has outpaced headline inflation in the Eurozone over the past two years. During the 2022–2023 energy shock, headline inflation led and dragged core prices higher due to strong global demand and robust wage bargaining power, which may not be present this time [1].
The ECB may face challenges achieving unanimity in policy decisions, with Governing Council member Muller stating the central bank 'may not need fully visible second-round effects' before acting—a stance BNY views as bold given the current lack of information [1]. Wage data is expected to play a significant role in upcoming policy decisions, but collective bargaining rounds this year were not anticipated to result in substantial wage increases due to inflation stabilization before the conflict [1].
BNY’s bias is that aggressive pricing of front-end hikes in the UK and Eurozone will likely be pared back, though the process is expected to remain volatile [1].
CONCLUSION
BNY’s analysis suggests that stagflation risks are rising in the Eurozone, with energy-driven headline inflation and potential policy splits within the ECB. The market may see less aggressive rate hike pricing, but volatility is expected as inflation and wage data evolve. Investors should closely monitor upcoming CPI figures and ECB policy signals for further direction.