Near Term Inflation Outlook
The Middle East conflict is described as the main factor shaping the near-term inflation outlook. Possible spillovers mentioned include pressure on food and goods prices linked to fertiliser shortages and wider supply chain disruption. Industry selling price expectations were reported as rising to their highest level since early 2023. Consumer inflation expectations were reported as increasing to levels last seen in the early 1990s and in the first half of 2022. The European Central Bank’s focus is on keeping inflation expectations near 2%. The report says the risk of broader rises in headline and core inflation increases if disruption lasts longer, with outcomes depending on how the conflict develops. The sudden jump in Eurozone inflation to 2.5% is a significant shift, driven entirely by energy. With Brent crude surging past $98 a barrel this month, a nearly 15% increase, the pressure is mounting from a single source. This puts the European Central Bank in a difficult position, as core inflation actually eased to 2.3%.Market Pricing And Volatility
We see the ECB’s primary concern shifting to anchoring inflation expectations, which are now hitting levels we last saw during the 2022 energy crisis. Consequently, the derivatives market is rapidly pricing out expected rate cuts for this year, with traders now positioning for a more hawkish stance through instruments like Euribor futures. This mirrors the pattern we observed in late 2025 when similar supply fears briefly delayed easing expectations. The sheer uncertainty surrounding the conflict’s duration means we should expect higher market volatility in the weeks ahead. The VSTOXX, the main gauge of Eurozone equity volatility, has already jumped over 30% in the past month, indicating a rising demand for portfolio protection. This suggests buying put options on major indices or using volatility derivatives could be prudent strategies to hedge against downside risk. We must now watch for second-round effects, as the risk of this energy shock bleeding into core prices is high. For instance, the latest survey data shows industrial selling price expectations are now at their highest level since early 2023, reflecting concerns over supply chains and input costs. This suggests considering positions in derivatives tied to agricultural commodities or industrial sectors that are highly sensitive to energy prices. Create your live VT Markets account and start trading now.
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