Upward revisions to the growth outlook are raising the baseline inflation trajectory, suggesting that stronger-than-expected demand could sustain or amplify price pressures and reduce the scope for any near-term policy easing.

An Iran-war-driven energy shock is the primary driver of the current inflation surge, with the ECB specifically concerned that supply disruptions could prove persistent rather than transitory — a longer-lasting shock would entrench elevated inflation and justify sustained policy tightening beyond the June rate rise.

Services remain the single largest contributor to headline inflation, and their continued elevation signals that domestically generated price pressures are not yet subsiding — a dynamic that would complicate any pivot toward easing even if energy prices stabilise.

Negotiated wage growth has ticked up modestly to 2.7% but shows no material response to the energy shock, and inflation expectations remain anchored — this limits the risk of a wage-price spiral and is currently the main factor preventing a more aggressive tightening path.

A prolonged Middle East conflict is assessed as the key upside risk to the inflation baseline: scenario analysis shows that conflict duration directly shifts the inflation path upward, making conflict resolution — or escalation — a concrete trigger for reassessing the policy stance.

Despite the June rate hike and rising long-term bond yields tightening financial conditions, inflationary pressures are persisting, indicating that the transmission of policy is not yet sufficient to bring inflation under control and that further tightening may be warranted.

Rising long-end yields, driven partly by global AI-related financing demand, are being watched as a potential amplifier of financial tightening — if the move becomes disorderly or outpaces policy intent, it could tighten conditions beyond the desired pace and affect the growth and credit outlook.