Energy, not core prices, now steers rate expectations in both the euro area and the UK
Victoria Shinder2 min readTwo documents published this week show how far energy has moved to the centre of European monetary policy. On 7 November the ECB released Christine Lagarde's interview with Yomiuri Shimbun, and on 6 November the Bank of England published its latest Market Participants Survey, taken on 21 to 23 October.
In the euro area, headline inflation reached 4% in October. Lagarde attributed it largely to energy inflation of 20.8%, up from 18.9% in September, while core inflation held at 2.5% and services at 3.3%. Her line was that underlying inflation is stable and the ECB sees no second-round effects beyond its projections, but that the longer headline inflation stays high, the greater the risk to the target.
In the UK, the 80 survey respondents gave energy and related commodity prices an average weight of 30.3% in shaping their near-term view of Bank Rate, well ahead of realised inflation excluding energy at 18.5% or the MPC's own communications at 15.3%. Their median expected CPI near 4% into early 2027 and a Bank Rate of 4.25% from February.
The two central banks are thus watching the same thing from different positions. The ECB is trying to look through an energy shock without repeating 2021, when, as Lagarde said, central banks judged a supply shock transitory while demand was also recovering. UK markets, meanwhile, are pricing policy largely on where energy goes next rather than on domestic price pressure.
Both also point to the same test: whether energy costs spread into wages and services. Lagarde named multi-year wage agreements and firms' wage expectations as the indicators to watch, and the BoE survey's respondents saw risks to the neutral rate skewed upwards by 42 to 4.
What it means
As long as core inflation stays put, an energy shock argues for patience; once it reaches wages, it argues for higher rates. The data that settle that question are wage settlements, not the headline inflation figure.