BNY’s Bob Savage says stagflation risks in the Eurozone are rising as energy costs lift headline CPI, while core inflation stays more contained. He expects the European Central Bank (ECB) to remain cautious and to monitor second-round effects, with markets likely to reduce aggressive pricing for near-term rate rises in the Eurozone and the UK. The International Energy Agency will brief EU finance ministers, with the briefing expected to prompt more national support for motorists and industry. It notes that shortages are less acute than in emerging markets, though some products may face supply limits.

Eurozone Inflation Signals And Energy Shock Context

If households cut spending, core inflation may rise less, which could reduce the need for rate rises to restrain demand. CPI figures due next week are framed as an early guide to how inflation is shifting. Over the last two years, Eurozone core inflation has run ahead of headline, while in the 2022–2023 energy shock headline led and then pushed core higher. That earlier period coincided with recovering global demand and strong wage bargaining power, which may be weaker now. ECB unity may be harder, after Governing Council member Muller said action may be needed without fully visible second-round effects. Wage data are expected to influence policy, and 2026 collective bargaining rounds had not been expected to show material increases. Risks of stagflation are growing in the Eurozone as energy costs push headline inflation higher while core inflation remains low. Markets are currently pricing in several aggressive interest rate hikes from both the European Central Bank and the Bank of England. This setup presents a clear opportunity for traders who believe this pricing is overdone.

Trading Implications From Rate Repricing Risk

The recent surge in Brent crude to over $95 a barrel in the first quarter of 2026 is fueling these fears. We’ve seen this reflected in the latest flash estimates for March, which show headline inflation climbing to 2.8% while core inflation has barely moved from 2.1%. This divergence is key to understanding the ECB’s likely path forward in the coming weeks. We are not seeing a repeat of the 2022-2023 energy shock, when global demand was roaring back and strong wage growth, which peaked near 4.7% in 2023, pushed all prices higher. This time, household purchasing power is weaker and wage bargaining rounds in early 2026 have been far more subdued. This underlying economic weakness could prevent inflation from becoming broad-based. Because of this, the ECB is unlikely to hike rates as aggressively as the market currently expects. Central bankers will be cautious about tightening policy into a slowing economy, especially if rising energy bills force households to cut back spending anyway. This could naturally cool the economy without the need for multiple rate increases. This suggests traders should position for a repricing of rate expectations, betting that fewer hikes will be delivered than are currently priced in. Given the expected volatility as the market digests this, using options to express this view could be a prudent strategy. This allows for participation in the move while managing the risk from sharp, unexpected swings. In the coming weeks, we will be watching the Eurozone HICP inflation figures very closely for any signs of second-round effects. Wage negotiation data will be equally critical, as it will signal whether inflation is truly becoming embedded. These data points will likely be the primary catalysts for the market to adjust its current pricing. Create your live VT Markets account and start trading now.

Start trading now – Click here to create your real VT Markets account