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Higher energy prices are the main drivers of inflation in the euro area, ECB economists Kristina Barauskaitė Griškevičienė and Claus Brand wrote in a paper on Tuesday.
“This time the energy supply shock dominates, while demand and public policy stimulus have minor roles. These differences are key to explaining why monetary policy responses differ,” they wrote.
The current shock, driven in part by the ongoing war in the Middle East and the subsequent closure of the Strait of Hormuz, differs significantly from the 2021-22 episode, the two economists explained.
“Adverse energy supply factors accounted for around 90% of the increase in energy inflation between January and May 2026. During this period, monetary and fiscal policies have exerted only slight downward pressure on energy inflation,” the paper said.
After war broke out in the Middle East at the end of February, the ECB did not raise interest rates immediately. It delivered its first hike on 11 June, lifting its deposit rate from 2% to 2.25% — its first increase in three years — in an effort to contain inflation.
Even in the ECB’s most optimistic scenario at the time, which assumed an early end to the war, inflation was not expected to return to the 2% target before 2027.
However, with the war still raging and inflation now at 3.3% in August (up from 2.9% in July), the ECB is expected to raise rates again, from 2.25% to 2.50%, at its meeting on 10 September, according to market pricing.
The monetary response is more “gradual” this time, the ECB explained in the paper, whereas in 2021-22 “the ECB raised interest rates forcefully and persistently,” the economists wrote.
Unlike now, the 2021-22 inflation surge was driven by “a combination of large and unprecedented supply and demand-side factors.”
Although energy played a role, it was “not an exclusive one,” the ECB explained.
“Supply-side factors included global supply chain disruptions and energy supply shocks, particularly as a result of Russia’s invasion of Ukraine. Demand-side factors included a rapid post-pandemic rebound in demand, compounded by accommodative fiscal and monetary policies.”