ECB chief economist LANE said on Thursday that even if the Middle East conflict
is resolved quickly, the resulting energy shock could have a lasting impact on
inf. While oil prices have historically fallen back to prior levels after a
sharp spike, the current episode may differ because countries are rebuilding
inventories or adjusting energy mixes, leaving energy costs elevated. LANE said:
"Global oil supply fell quite rapidly and sharply overnight, a gap that had
previously been masked by inventories. Even if the initial energy shock begins
to fade, second‑round effects will persist for some time." He added that policy
lessons from past energy shocks include that rising energy costs can abruptly
push up inf and trigger "various non‑linear" mechanisms that broaden price
increases. "But this is different from the non‑linear case four years ago," he
said, referring to the Ukraine war, when supply disruptions combined with strong
demand from the post‑COVID restart to lift inf. LANE said central banks must
acknowledge any major shock and its potential impact on inf, but should avoid
overreacting when setting monetary policy.
