Gabriel Makhlouf, an ECB governing council member and Governor of the Central Bank of Ireland, wrote on Friday that he will monitor indirect impacts from higher energy prices. He said these could feed cost-push inflation through production, transportation, and services.
He said second-round effects through wages may take longer to appear because wage-setting in Europe is staggered. He added that inflation expectations should be watched for signs they are becoming unanchored.
Energy Prices And Cost Push Inflation
Markets showed little response to the comments in the euro. At the time of reporting, EUR/USD was up 0.2% near 1.1755, linked to weakness in the US dollar.
We are paying close attention to how higher energy prices are creating cost-push inflation in production, transportation, and services. The recent Eurozone flash inflation estimate for April 2026 came in unexpectedly high at 2.8%, showing these pressures are very much active. This has renewed focus on the indirect effects that ripple through the entire economy.
Looking back at the volatility in 2025, we learned that energy price shocks have a long tail. Today, with Dutch TTF natural gas futures having climbed over 15% in the last month, those concerns are becoming a reality again. These higher input costs are now clearly passing through to final goods and services.
The potential for second-round effects via wages, which was a more distant concern previously, is now our primary focus. Data for the first quarter of 2026 showed negotiated wage growth accelerating to 4.2%, putting upward pressure on core inflation. We must now closely monitor inflation expectations for any signs of de-anchoring from the central bank’s target.
Trading Implications For Rates And FX
For derivatives traders, this signals a need to position for a more hawkish European Central Bank in the coming weeks. This could involve paying fixed on short-dated euro interest rate swaps or buying call options on EURIBOR futures to hedge against or speculate on higher rates. The market is now pricing in over an 80% chance of a rate hike by the September 2026 meeting, a sharp reversal from just a month ago.
This environment also creates opportunities in currency options, as policy expectations for the ECB are shifting more rapidly than for other central banks. We see value in positioning for a stronger euro against currencies with a more neutral monetary policy outlook. Long EUR/USD call options could provide a limited-risk way to capitalize on this divergence.
