Near Term Inflation Path
With oil at 100 USD/bbl and TTF natural gas at 50–55 EUR/MWh, inflation could briefly reach 4% in autumn. Under ING’s base case, where disruption eases in 2Q and energy prices gradually fall, inflation is expected to peak at 3.5% in September. The inflation peak is described as 1 percentage point higher than anticipated before the war began. The outlook also points to 2025 as a better reference year for how the economy may respond to the current situation. With current uncertainty, we should look to the past for guidance on how the market might react in the coming weeks. The energy shock of 2022 provides a stark reminder of how quickly forecasts can be wrong. Early projections at that time saw inflation peaking around 4%, but we now know the Consumer Price Index (CPI) actually surged to a 41-year high of 11.1% by October 2022. This experience suggests that initial inflation estimates following a supply shock are often too low. Therefore, traders should be wary of any consensus view that today’s pressures will be minor or brief. Volatility options could be underpriced if the market is expecting a smooth adjustment.Implications For Traders
However, we believe the economic response will follow the playbook from 2025, not 2022. Last year, we saw inflation fall steadily back towards the 2% target, but it came alongside a very fragile jobs market and weak GDP growth, which the ONS confirmed was just 0.4% for the entire year. This backdrop made the Bank of England hesitant to make any sudden moves. Given that the latest unemployment data from February 2026 shows a slight uptick to 4.5%, the Bank will likely prioritize economic stability over aggressively tackling the recent rise in services inflation. They will be cautious about tightening policy and risking a recession, just as they were through much of last year. This suggests that interest rate futures may be pricing in a more aggressive response than we are likely to get. Traders should consider positions that benefit from the Bank of England remaining behind the curve. This could involve looking at interest rate swaps that bet on rates staying lower for longer than the market currently anticipates. The key is to trade the central bank’s likely reaction, which will be shaped by the fragile economic memory of 2025. Create your live VT Markets account and start trading now.
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