Euro area: Energy shock rekindles price pressures – Societe Generale

Societe Generale economists Sam Cartwright, Michel Martinez and Jorge Garayo analyse Euro Area inflation following the latest energy shock. They note headline inflation has already risen to 3% and expect indirect and second‑round effects to push it toward 3.5% in early 2027. The authors highlight ageing demographics, German fiscal support and elevated uncertainty around Middle Eastern risks.

Energy shock drives renewed price pressures

"Euro area headline inflation has surged from 1.9% yoy in February to 3.0% yoy in April. This increase has been driven largely by the rapid pass-through from higher Brent to fuel prices, which we estimate have added around 1.1pp to headline inflation since February."

"Assuming our baseline Brent scenario materialises, in which the Strait of Hormuz gradually reopens within weeks, the fuel price effect is likely to have already peaked in April."

"The ongoing energy shock has already pushed headline inflation to its highest level since late 2023, reaching 3% in April. This is not the peak. We expect indirect and second-round effects to drive headline inflation to around 3.5% in early-2027."

"Indirect and second-round effects are likely to push headline and core inflation to peaks of around 3.5% yoy and 2.6% yoy, respectively, in early 2027. This reflects our fundamental view that population ageing keeps the labour market tight, while the German fiscal stimulus provides support to the economy."