So far it has been quite a week for economic trends and markets and as I type this it is only Tuesday morning! But I wish to examine a feature that will lead to a gnashing of teeth at various central banks including my home one the Bank of England. A word it has continuously used has been “disinflationary” and it was quite happy to do so when UK inflation doubled. But the conflict in the Middle East is pitting even its willingness to abuse the real meaning of words under pressure.
We can start with something described by the Rolling Stones as “it’s a gas,gas,gas” an issue we looked at yesterday.
Europe faces its biggest energy crisis since Russia’s invasion of Ukraine in 2022 Qatar shut production at the world’s biggest LNG export plant after an Iranian drone attack. That facility produces ~20% of global LNG supply Europe will need to compete with Asia for LNG. (
@SStapczynski)
That poses quite a problem and this morning he has pointed out this.
European gas prices surge another 10% as Qatar’s LNG export plant is still offline Prices up >60% over the last two days.
Then things added an element of panic.
Hello, Europe gas is now up more than 30% today.
So yesterday’s concern about higher gas prices has got worse and it is the UK and Europe that are most exposed due to their energy policies. I looked at the UK situation yesterday and this morning it has also got a nudge via wind power more than halving reminding us of the way it varies.
If we switch to crude oil we see this.
Tanker traffic through the Strait of Hormuz, through which a fifth of oil production flows, has all but ground to a halt…….And yet while prices surged higher, the scale of the moves has been far smaller than in previous crises. Brent crude is only at its highest since June, ( Bloomberg)
As you can see they are trying to play it down but in terms of the numbers we are up around 3 to 4 US Dollars on yesterday.
It’s true—Brent crude is up ~5.3% today to around $81.80/bbl (WTI ~5.4% to $75), hitting highs not seen since Jan 2025. ( Grok)
Next up is what is sometimes called King Coal.
Asia’s coal prices jumped to the highest level since 2024 The massive Qatar LNG outage is going to force Asian consumers to use more coal. Most of Qatar’s LNG goes to China and India — big coal users Newcastle coal futures, the Asian benchmark, +8.6% to $128.70/ton. @SStapczynski)
Coal is an example of collateral damage or if you prefer an indirect effect as reduced supply of alternatives leads to higher expected demand for it.
The ECB Chief Economist Philip Lane
Philip Lane has been interviewed by the Financial Times and they added a couple of questions to deal with the current crisis. The first part of the reply is simply to state the obvious.
Eurosystem staff published a scenario analysis in December 2023 that indicated there would be a substantial spike in energy-driven inflation and a sharp drop in output if a conflict led to a persistent drop in energy supplies and disruptions in regional economic activity. The impact would be amplified if it also gave rise to a repricing of risk in financial markets.
So they needed research to figure out that conflict in the Middle East would lead to higher energy prices and it would get worse if it persisted?! But then things took another turn with the next question and answer.
What impact do you expect on growth and inflation in the euro area, and what could trigger a response from the ECB?
Directionally, a jump in energy prices puts upward pressure on inflation, especially in the near term, and such a conflict would be negative for economic activity. The scale of the impact and the implications for medium-term inflation depend on the breadth and duration of the conflict. The ECB will be closely monitoring developments.
This was quite a change on the interview he gave to La Stampa on the 16th of January.
Over the course of this year we expect to see a transition towards a more sustainable 2% inflation rate, where both services inflation and wage inflation come down. This puts the stabilisation of inflation at our 2 per cent target on a more secure basis.
Of course events have moved on but as I frequently point out central banking theories about core inflation that ignore energy prices have the problem that they keep doing this to inflation in the real world.
I like to move it, move it
I like to move it, move it
I like to move it, move it
Ya like to move it! (Reel2Reel)
Actually the ECB Twitter or X feed has rather ramped things up just now by repeating this.
The ECB will be closely monitoring developments in the Middle East, says Chief Economist Philip R. Lane. The scale of the impact and the implications for medium-term inflation depend on the breadth and duration of the conflict.
Euro area growth
Along the way the interview had a very interesting framing.
One defining feature of the euro area economy over the past year has been that growth has been stronger than most people expected. How surprising has this been for you, and what is driving this?
That is a Financial Times question rather reinforcing the view we have seen regularly expressed by ECB President Christine Lagarde that the economy is in “a good place”. However the response was in fact rather downbeat.
The European economy has been growing in the neighbourhood of its potential.
Remember this level of economic growth has led to the ECB bemoaning the Euro area’s relative performance. I looked at this issue on the 13th of February.
The Euro Area economy expanded by 1.3% year-on-year in the final quarter of 2025, marking its slowest pace in a year but easing only slightly from 1.4% in the previous quarter and matching the preliminary estimate. (Trading Economics)
That had reminders of these words from Dr.Isabel Schnabel from the 19th of February 2024 and the emphasis is mine.
However, this capability is increasingly under threat. At the turn of the millennium, Europe was operating at the global technological frontier, but today many euro area firms are laggards. Compared with many of their global peers, they invest less in both physical capital and research and development, and they are less productive.
If you have sustained weak growth then that leads into today’s theme because changes are likely to be more inflationary.
Also there is an issue here.
It depends on the horizon you’re looking at. In the near term, AI involves investment – for instance building data centres and investing in working out how to use AI in firms.
How is Europe going to have data centres with its energy policy? France maybe but even it has long lead times for new nuclear power stations.
Comment
As you can see the environment looks decidedly more inflationary. Initially that comes through energy markets but we know that there will be second-order effects into other ones. There is another consequence if I switch to my leading indicator for UK mortgage rates which is the five-year yield. Last week cuts looked in the offing as it fell below 3.75% but this morning as things get repriced it has risen above 4%. When UK Chancellor Reeves stands up today she will be bemoaning the timing of her Spring Statement.