Energy crises: Initial economic conditions shape inflation impact
The current energy shock, driven by the Middle East war and Strait of Hormuz closure, is impacting a more balanced euro area economy. Initial economic conditions significantly influence how such shocks propagate to inflation.
Oil vs. Gas: A different shock
The current energy shock, triggered by the Middle East war in early 2026, primarily disrupts oil supply, unlike the 2022 crisis which focused on natural gas.
This has led to a faster upsurge in crude oil prices and refined products like diesel, while wholesale gas and electricity prices have reacted more mutedly due to increased renewable energy generation.
However, oil supply shocks propagate to consumer inflation faster than gas shocks, and the current global nature of the shock implies larger indirect effects along global value chains, potentially causing import prices to rise more sharply.
This suggests a less broad-based direct energy shock but with potentially wider, faster-acting inflationary pressures through different channels.
A more balanced starting point
The euro area economy entered the 2026 energy crisis in a more balanced state than in 2022.
Headline inflation was near the ECB's 2% target, reducing the risk of amplified price and wage reactions.
Demand was subdued, with new orders around the no-change threshold, and supply-side constraints were less prevalent.
The labor market was less tight, showing eased demand and moderated wage growth.
The monetary-fiscal policy mix was also broadly neutral, and fiscal space more limited, contrasting with the expansionary policies and ample fiscal room of 2022.
Better prepared, but risks remain
The euro area is better positioned to absorb the current energy shock due to a more balanced economy and lower initial inflation.
However, the global nature of the oil shock and limited fiscal space could still amplify inflationary pressures.
Recent high inflation experiences may also make households and firms more sensitive to price changes, influencing future inflation dynamics.