Is a perfect inflation storm returning to the CEE region?
The CEE region faces mounting inflation pressures as geopolitical tensions disrupt energy markets, with implications for regional currencies. Per the full note from **Frantisek Taborsky** at ING, key inflation metrics are expected to rise due to escalating energy and food prices, compounded by the fading of baseline effects from last year. This environment is likely to prompt quicker monetary policy responses from central banks, as inflation risks are increasingly evident, particularly in Central and Eastern Europe. Given the existing market structure, traders should remain vigilant to shifts in positioning as inflationary realities begin to influence expectations.
What the desk is arguing
The CEE region is bracing for a potential resurgence of inflationary pressures driven by rising energy and food prices stemming from geopolitical conflicts. The desk frames this as a crucial moment for traders, with inflationary signals indicating the need for more aggressive tightening from central banks. Per the full note from ING, this could serve as a pivotal catalyst for volatility in regional currencies as inflation metrics begin to surprise to the upside.
Recent customs indicate that inflation has already begun to rise, with costs primarily influenced by surging fuel prices. The CEE inflation landscape is precarious, as the potential for sharp increases looms with core inflation remaining unexpectedly stable, signaling that further second-round effects from energy price shifts may be delayed.
Where it sits in our coverage
With our consensus target for the EUR/PLN at 1.075, supported by jpmorgan's Mar-26 target of 1.10, we expect that inflation developments will significantly impact regional currency dynamics. The consensus view among traders reflects cautious optimism, with expectations that swift action from central banks could help mitigate further inflation escalation.
How other firms see it
Meanwhile, some firms, like bofa, maintain a more pessimistic outlook, suggesting targets around 1.04, reflecting diverging views on monetary policy effectiveness and inflation trajectory. This stark contrast highlights the conflicting perspectives on the economic pressures in the region.
Additionally, keep an eye on the USD/PLN trajectory, as it mirrors broader regional dynamics and the impact of U.S. monetary policy reactions intertwined with global inflation trends.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01CEE inflation risks are intensifying due to geopolitical tensions affecting energy and food prices.
- 02Central banks may be forced into faster tightening as inflation metrics surprise to the upside.
- 03Core inflation stability does not negate the imminent risk of rising prices from energy costs.
- 04Traders should monitor the evolving landscape for potential shifts in monetary policy and market volatility.
Market implications
Look for signals as inflation figures are reported and central bank communication shifts, potentially altering EUR/PLN dynamics. Movements around key resistance levels, particularly at 1.08, may serve as confirmation points for inflationary trends.
Risks to this view
A significant easing of geopolitical tensions or an unexpected decline in energy prices could substantially alter the inflation outlook, reversing any central bank tightening decisions and creating downward pressure on regional currencies.
Opinions Opinion by Frantisek Taborsky Is a perfect inflation storm returning to the CEE region? Published 09:11 CEE inflation risks are rising as the US-Iran conflict drives energy, food and shipping costs higher. Weak food prices have delayed inflation, but fading base effects and January resets may expose broader pressures, prompting faster central bank tightening and renewed fiscal intervention if inflation surprises to the upside Pass-through takes time When the US-Iran conflict began in March, we argued that conditions differed from 2022 and that a comparable inflation surge was unlikely.
But as the conflict persists and escalates, the picture has changed. In some respects, it increasingly resembles 2022. In others, the inflation outlook is worse.
We dubbed 2022 a "perfect storm" of soaring energy costs, loose fiscal policy, Russia-Ukraine war spillovers and the post-pandemic reopening. Today, many of those forces are re-emerging, and in some cases, proving even more powerful. The CEE region is especially vulnerable to the latest supply shock, given the heavy weighting of energy and food in regional CPI baskets.
Inflation rose across the region in September, driven mainly by fuel prices. Core inflation remained stable, suggesting that significant second-round effects have yet to emerge in consumer prices, a pattern also seen elsewhere in Europe. But that may change.
One lesson from 2022 is that price pass-through, especially from energy, can take considerable time. Price increase eight months after the start of the conflicts (%) and inflation surprises in CEE region (bp vs consensus) The perfect storm is gathering again Let's start with the global backdrop. Oil and gas prices are again in sharp focus.
Expectations for a brief conflict and rapid de-escalation proved wrong, leaving energy prices elevated long enough to invite comparisons with 2022. At this stage, however, energy prices have risen much faster after the US-Iran conflict than they did following Russia’s invasion of Ukraine. Unlike in 2022, price pressures now span a much broader range of commodities.
Oil and refined products face added disruption because they must be transported to end users, while many refineries in the Middle East and Russia are offline following military strikes. Meanwhile, shipping costs have surged to record highs, a pressure absent in 2022. Although oil flows through the Strait of Hormuz are recovering, crude prices remain elevated, and some refined products have exceeded their 2022 peaks.
Food prices face a similar “perfect storm”. Alongside higher energy costs, agricultural commodity prices have risen sharply. Since the US-Iran conflict began, rice has surged by 70% and sugar by 42%, while corn, soybeans and wheat have gained roughly 10-20%.
Sources & References
How we cover this story