Energy Prices Meet a More Fragile Inflation Environment

• Inflation risks are back: The escalation in the Middle East is driving up energy prices and bringing the vulnerability of the price environment back into focus.
• A more fragile environment: So far, the energy price shock has been milder than in 2022, but it is hitting a significantly more unstable inflation structure.
• Investors need to rethink: The classic mix of equities and nominal government bonds is unlikely to be sufficient to effectively cushion inflation risks.

With the latest escalation in the Middle East, inflation risks are once again moving more firmly into the focus of capital markets. Fuel and heating oil have become significantly more expensive, noticeably increasing price pressure. In April 2026, the inflation rate in Germany rose to 2.9 percent. Energy prices were more than 10 percent higher than in the same month of the previous year, marking the strongest increase since February 2023.

At first glance, the comparison with the 2022 energy crisis seems obvious: a geopolitical shock, a supply shortage and rising energy prices. However, this comparison falls short. So far, the current energy price shock has been milder than in 2022. In particular, the rise in gas prices remains well below the extreme levels seen at that time. In addition, the ECB has scaled back its ultra-expansionary monetary policy; money supply growth is comparatively slow. This means that two key price drivers from that period are no longer present — at least not with the same intensity as before.

Against this backdrop, it is often argued that the current energy price shock is likely to trigger primarily one-off effects on the price level. In our view, caution is nevertheless warranted. The decisive difference lies less in the shock itself than in the environment it is encountering. Unlike before the pandemic, when inflation rates remained below the ECB’s two-percent target for years, there is no longer a comparable degree of reliable price stability today. The question, therefore, is not so much whether a new price shock alone can trigger a phase of high inflation. What matters is whether today’s inflation environment is stable enough to absorb such a shock without renewed pressure on wage- and price-setting processes as well as inflation expectations.

Services Prices Shape the New Inflation Environment

This changed starting point is particularly evident in the composition of inflation. While the inflation contributions from food, non-energy industrial goods, energy and services remained comparatively stable in the 2010s, the pandemic and the energy crisis significantly altered this pattern. The energy price shock of 2022 and 2023 initially drove headline inflation; with a lag, price pressure then also spread to food and non-energy industrial goods. By now, the direct energy effect is significantly smaller; over long stretches of 2024 and 2025, energy even had a disinflationary effect. Prices for food and non-energy industrial goods have also largely stabilised. What remains striking, however, is the contribution from services. After 4.4 percent in 2023 and 3.8 percent in 2024, services prices continued to rise at an above-average rate of 3.5 percent in 2025. Alongside rising rents, this persistence mainly reflects the delayed pass-through of strong wage increases. Most recently, however, there were signs of a slight easing: in April 2026, services inflation fell back to 2.8 percent. Whether this already marks a sustainable trend reversal remains open; continued elevated wage dynamics suggest that a cautious interpretation is warranted.

As a result, the inflation structure has shifted in recent years: away from a broad-based, energy- and goods-driven price surge and towards an environment in which stickier, more domestically driven services determine the inflation trend. This increases the risk that energy price increases will not remain limited to a temporary price-level effect. The longer services inflation and wage growth remain elevated, the more likely it becomes that new cost shocks will feed into price- and wage-setting processes.

With the 2022 energy price shock, expectations temporarily surged to more than 3 percent and temporarily decoupled from the inflation target. In the subsequent phase from 2023 to 2025, there was some easing. However, expectations did not return to the old low-inflation regime. Instead, swap rates settled near the 2-percent mark and thus remained significantly above the levels of the 2010s.

With the latest escalation in the Middle East, market-based inflation expectations have risen again. The five-year swap rate in particular is once again moving towards 2.5 percent. Market expectations therefore also point to a shift in the inflation level; at the same time, investors are once again demanding higher compensation for a more uncertain price environment. Today, the 2-percent mark appears less like a comfortable upper limit and more like an anchor with noticeable upside risks.

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For Capital Market Investors

The current energy price shock is not a repeat of 2022, but it is hitting an inflation environment that appears significantly less stable than before the pandemic, shaped by persistent services prices and elevated inflation expectations. For the ECB, this is an uncomfortable development. As long as inflation expectations remain anchored, it can more readily classify energy price shocks as a temporary shift in the price level. The more this anchoring is called into question, however, the greater the pressure for monetary policy action becomes.

Investors should pay greater attention to the possibility of inflation remaining above the ECB’s target over the medium term. In periods of low and stable inflation, government bonds were often able to cushion price losses in equities. In an environment of continued price pressure and high interest-rate volatility, however, this diversification effect may be significantly weaker or may even temporarily reverse — as was already observed in 2022. The classic mix of equities and nominal government bonds is therefore unlikely to be sufficient to cushion inflation risks. Real sources of return such as infrastructure and commodities, inflation-linked bonds, active bond and duration strategies, as well as equities of companies with pronounced pricing power may gain in importance. Strategic asset allocation therefore does not need to reinvent itself. It should, however, move away from the assumption that low and stable inflation will permanently form the basis for reliable diversification effects between equities and bonds.

This article was first published online in Börsen-Zeitung on18.05.2026.
 

ARTICLE BÖRSEN-ZEITUNG