Weekly Update - Central banks : fears of rising inflation expectations

Next week, four of the world’s major central banks will hold their monetary policy meetings: the Fed, the ECB, the BoE and the BoJ. While no change in policy rates is expected in April, their statements will be closely scrutinized amid renewed uncertainty. The war in the Middle East has indeed revived concerns about energy prices, and with them a crucial question for central bankers: could this shock de-anchor inflation expectations, at a time when the 2022–2023 inflationary episode remains very present in people’s minds ?

The key role of inflation expectations.The war in the Middle East has already triggered a marked rise in energy prices, visible in the first inflation data for March. Taken in isolation, this shock is a priori viewed as transitory : as long as its magnitude and duration remain limited, its direct impact on inflation should fade over time. In theory, this is precisely the type of exogenous shock that central banks can—and should—look through beyond its short-term effects, avoiding excessive reactions to a temporary increase in prices.
However, this reasoning runs up against a particular context. The global economy has barely emerged from an inflationary episode of unprecedented scale in several decades, with cumulative consumer price increases close to 20% between 2021 and 2023 in many advanced economies. This episode has left a deep mark on households and firms. The memory of inflation remains vivid, and confidence in its control has not been fully restored. Yet inflation is a phenomenon that is inherently dependent on expectations: what economic agents fear tomorrow directly influences their behavior today, whether in terms of wage demands, pricing policies or investment decisions. Thus, the risk does not lie in the one-off rise in energy prices, but in their potential diffusion into wages and service prices, which explains the vigilance of central banks.

Inflation expectations : what we are observing. The various measures of expectations point in the same direction, even if their magnitude differs. First, on the household side, surveys show a marked rise in short-term inflation expectations, reflecting a strong sensitivity to energy prices, particularly gasoline. Indeed, households primarily base their reasoning on the inflation they observe in their daily lives, which makes their expectations especially reactive to visible and immediate shocks.
At the same time, financial markets are sending a more moderate signal: inflation breakeven indicators have risen, particularly at the one- to two-year horizon. Nevertheless, investors do not anticipate a return to very high or persistent inflation. Finally, from the economists’ consensus perspective, inflation forecasts have been revised upward mainly for the year 2026, but not beyond.

Monetary tightening in sight. In this context, central banks should maintain a cautious bias. This does not necessarily mean raising rates, but rather maintaining a vigilant communication clearly oriented toward preventing second-round effects. The objective is explicit: to prevent this geopolitical shock, exogenous by nature, from turning into an endogenous inflationary shock via expectations. It should be noted that this strategy is not without risk: this vigilant stance is already being transmitted to market interest rates, with the longer-term risk of weighing on economies that are already weakened by the energy shock.

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