The fundamental challenge is timing. While energy prices can surge overnight, monetary policy works with a lag. By the time higher interest rates soften demand—and, by extension, price increases—inflationary pressures may have already taken hold. The conventional wisdom has been to “look through” such supply shocks. But central banks can’t ignore potential knock-on effects. If higher inflation leads workers to demand higher wages, which feeds into broader price pressures, a temporary shock could become persistent. This is why we expect central banks to err on the side of caution in containing inflation.
The path depends on each central bank’s starting point. With inflation having tracked close to its 2% target in recent months and the labor market stable, the ECB finds itself in a stronger position to deal with an inflationary shock than in February 2022, when inflation was already at 6% and the labor market was tight. That recent history could keep the course of policy finely balanced between hiking and holding, with memories of surging inflation still fresh.
Assuming oil prices in a $90–$100 per barrel range and natural gas averaging €60/megawatt-hour for one to two quarters, we upgraded our 2026 ECB headline inflation forecast to 2.5% while lifting our forecast for core inflation—which excludes volatile food and energy prices—more modestly to 2.1%.
The BoE finds itself in more precarious territory. U.K. inflation has been above its 2% target for roughly five years. Core inflation remained above 3% in February 2026 (the March reading is set to be released April 22). Policymakers are still fighting the last battle even as a new one arrives. We recently downgraded our 2026 U.K. GDP forecast by 0.4 percentage points to 0.6%.
The U.S. central bank has greater flexibility. As a net oil exporter, the U.S. is experiencing a smaller shock overall. Higher oil prices hurt consumers but benefit domestic producers. While sticky services inflation and tariff pass-through create complications, the Fed can be patient. The dominant risk is that rates stay higher for longer, not that the Fed tightens policy.
The BoJ, meanwhile, is navigating upward price and policy normalization rather than disinflation. Higher oil prices and yen weakness support that journey by lifting near-term inflation while strong wage growth underpins the broader normalization narrative.
