The first derivative of the war in the Middle East is measured in barrels and inflation. The second, in interest rates. The war between Iran and the United States brings to the fore the rise in energy prices as a global inflationary trigger. However, the change compared to 2021 and 2022 could be the reaction of central banks. No governor wants to underestimate a supply shock. Higher energy prices can quickly be passed on to production costs, negatively impacting consumers. This pattern is reminiscent of the episode after the invasion of Ukraine in 2022, although the current context is different. Four years ago, the global economy was emerging from the pandemic with pent-up demand, bottlenecks in supply chains and strained labor markets, and European gas reached levels not seen before. Today, inflation is closer to the central banks’ objectives, reference rates are at neutral levels and a good part of the supply imbalances have disappeared. However, this improvement coexists with a factor that operates in the opposite direction: memory. Unlike 2021, companies and workers have experienced recent episodes of high inflation, increasing the risk of faster reactions in prices and wages to new cost increases. The risk is not only the initial shock, but its ability to generate inflationary persistence. It is precisely this lesson that sets the tone for central banks. Christine Lagarde, president of the ECB, insists on quickly detecting any signs of propagation towards underlying inflation, with a clearly preventive bias. Andrew Bailey, at the Bank of England (BoE), emphasizes that monetary policy cannot reverse a supply shock, but it must prevent it from leading to persistent inflation. In the US, Jerome Powell maintains a somewhat more balanced approach given the country’s lower energy dependence, although he recognizes that a prolonged conflict could have more lasting effects. The market has already adjusted its expectations. At the beginning of the year, stability in the ECB’s deposit facility and significant rate cuts for the Fed and BoE were anticipated. Today, a first rise is expected from the ECB in June, from the BoE in July, and the market no longer expects cuts from the Federal Reserve this year. In short, global monetary policy navigates between two symmetrical risks: repeating the mistake of 2022 and acting too late, or excessively tightening financial conditions in an economy that already shows signs of slowdown. The difference is that central banks now act with a lesson learned: when the price of energy rises, inflation is not always transitory, and when it stops being so, the cost of correcting it is significantly higher.Salvador Jimenez and Tomas Opazoteachers at Afi Global Education.
