Supply shocks push inflation to 3.8 percent, Ter Weel warns

Euro area headline inflation increased from 1.9 percent in February to 3.8 percent in September 2026, driven by higher energy prices following the outbreak of war in Iran.

Addressing researchers at the ESCB workshop, Bas ter Weel explained that monetary policymakers cannot always rely on a “look-through” strategy during severe supply-side disruptions.

Instead, central banks may be forced to tighten policy and lean against supply-driven price pressures to prevent temporary price increases from becoming entrenched.

Although labor markets have cooled and firms adapt better than during the 2021–2023 inflation episode, renewed oil and gas shocks keep inflation risks persistently elevated across member states.

Higher interest rates directly increase government debt-servicing costs, creating friction in countries with already elevated public debt.

When fiscal space is constrained, sovereign risk concerns can spill over into broader financial conditions and raise borrowing costs for private households and firms.

Ter Weel pointed to workshop research on French public finances to illustrate these vulnerabilities.

Sound fiscal frameworks remain necessary to absorb supply shocks, ensuring central banks can pursue price stability without aggravating financial instability.