THINK Ahead: Six months of the Iran War in six charts
The desk interprets the resilience of Europe's economy amidst the ongoing Iran War as indicative of stronger fundamentals than previously anticipated. Per the full note source, subdued inflation and a smaller shock compared to previous crises mitigate fears of extreme rate hikes. The data indicate that energy prices are contributing much less to inflation than in past crises, with energy costs now adding less than one percentage point to inflation in the Eurozone, significantly lower than the four-percentage point contribution recorded in July 2022. Therefore, the outlook for rate hikes is notably more tempered than market projections suggest.
What the desk is arguing
The thesis posits that Europe is navigating the Iran War with surprising economic fortitude, largely due to a lesser inflationary impact from energy prices. Per the full note source, concerns over stagflation have subsided as energy inflation now contributes less than a quarter of what it did only a year prior.
Supporting this assessment, the analysis highlights that the containment of inflation, notably around energy prices, is a significant departure from previous geopolitical shocks, such as the Russia-Ukraine war. Energy's minimal impact on the broader inflation basket suggests that core inflation pressures remain manageable, allowing for more flexibility from the European Central Bank in their monetary policy direction.
Where it sits in our coverage
Our current consensus target for the EUR/USD pair is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns with the broader market sentiment that forecasts stable economic conditions in Europe despite external shocks. The desk's positioning is consistent with the upper bound of this range, indicating an optimistic momentum in the euro.
01Europe's economy shows resilience amid the Iran War, contrary to initial fears.
02Inflation from energy prices has markedly diminished, offering a better outlook for the ECB's policy.
03Expectations for aggressive rate increases may need reassessment based on current inflation data.
04This scenario is less severe than previous geopolitical crises impacting the Eurozone.
Market implications
Traders should monitor the EUR/USD pair, particularly for movement around the 1.075 level, which aligns with our consensus target. Any shifts in ECB language regarding rate hikes in response to inflation trends could alter positioning in the euro, so watch for statements from central bank officials as they provide insights into future monetary policy.
Risks to this view
A sudden spike in global energy prices or a drastic policy shift by the ECB, reacting to unexpected economic data, could invalidate this call. Additionally, if broader market sentiment turns sharply risk-averse, we could see a reevaluation of euro strength against the dollar.
Opinions Opinion by James Smith THINK Ahead: Six months of the Iran War in six charts Published 10:00 Six months to the day since the Iran war began, Europe's economy has proved surprisingly resilient. James Smith argues that it's less about interest rates being too low and more about inflation staying more contained than some had feared, raising questions about the additional rate hikes markets have priced in The Strait of Hormuz closure actually benefited some European manufacturers as Asian rivals faced greater disruption Six months of the Iran War in six charts Six months into the Iran War, Europe is faring a lot better than many people had feared, don’t you think? Growth has so far held up.
And inflation hasn’t taken off as some had expected. ‘Stagflation’ concerns have subsided. That shouldn’t be too surprising. Though it hasn’t always felt like it from the daily oil price rollercoaster, this crisis has so far been much milder for Europe than the fallout of the Ukraine invasion four years prior.
By July 2022, energy was contributing a whopping four-percentage points to eurozone inflation. Today, it is adding less than a quarter of that. The numbers are similar in Britain too.
Even with the latest rise in natural gas prices, this basic fact is unlikely to change dramatically. Energy is contributing a lot less to inflation this time around Source: Macrobond, ING "> Source: Macrobond, ING Faced with a much smaller shock, we also shouldn’t be too surprised that there has been no sign of the energy spike broadening out to other areas of the core inflation basket. I’ve recreated an index that the ECB put together a few years ago, showing the inflation rate for goods and services that are indirectly sensitive to energy prices.
This includes everything from air fares to courier costs, plant prices to cafés – and it represents around a third of the total inflation basket. From a quick glance at the result, you wouldn’t know there had been a war at all. The inflation rate of this basket has barely budged.
And when I run a similar exercise for the UK, the inflation rate for energy-intensive items has actually fallen this year – even when you exclude the impact of last year’s one-off spikes in water bills and road tax. 'Energy sensitive' inflation hasn't risen... yet Based on 'Decomposing HICPX inflation into energy-sensitive and wage-sensitive items', part of the issue 3 of the ECB's 2024 economic bulletin. Calculations by ING Source: Macrobond, ING "> Based on 'Decomposing HICPX inflation into energy-sensitive and wage-sensitive items', part of the issue 3 of the ECB's 2024 economic bulletin. Calculations by ING Source: Macrobond, ING UK energy intensive inflation has actually fallen this year Based on energy intensity data from the ONS.
Calculations by ING Source: Macrobond, ING "> Based on energy intensity data from the ONS. Calculations by ING Source: Macrobond, ING So why, then, are the central bank hawks still worried about the upside risks to inflation? Influential board member Isabel Schnabel said this week that rates “must rise further", and her colleague from Bulgaria, Dimitar Radev, described the October and December meetings as “live”.
The answer lies in lags. Inflation has further to rise – expect to see that in next week's data. My chart above of energy-sensitive eurozone inflation shows that it tends to follow energy prices with a six-month delay.
In those cafés I mentioned earlier, it takes time for higher wholesale gas prices to hit their heating (or cooling!) bills, and longer still for them to get passed into the price of a cappuccino. The hawks are understandably worried that the impact is yet to show up. But this caution is overdone.
Just look at food inflation. Yes, most models will tell you that the peak impact from the Iran War won’t show up until next spring. Yet those same models say that we should be feeling something by now.
And the simple fact is that we aren't. Quite the opposite. Food inflation is trending down – and it’s virtually zero.
Here in Britain, the level of food prices is actually lower than it was three months ago. Across the three major economies in Eastern Europe, annual food inflation is negative. Food inflation has been remarkably benign Source: Macrobond, ING "> Source: Macrobond, ING This should reassure the hawks in Frankfurt – and here in London – for two reasons.
First, because if the Iran War was going to show up anywhere, it would be here. And second, food is often seen as a key driver of consumer inflation expectations. People know what their weekly shop costs, just like they know how much it costs to fill up their car.
Lower food inflation suggests that those officials who care deeply about these expectations can relax. And anyway, those expectations only matter if workers have the power to demand higher pay. Which, at the moment, they don’t appear to.
Another handy ECB index of “wage sensitive” inflation, which I’ve recreated, has fallen over the course of this year. 'Wage sensitive' eurozone inflation is easing Source: Macrobond, ING "> Source: Macrobond, ING This is a slow-moving beast, admittedly. Wage growth is famously the last thing to move after a shock. And, curiously, we have seen a slight pick-up in the growth of advertised salaries, according to the Indeed hiring agency.
But that doesn’t square against the ECB’s forward-looking indicator of negotiated wage growth. Nor are we seeing any discernible increase in the proportion of service sector firms looking to increase their prices over the coming months. Eurozone selling price expectations Source: Macrobond, ING "> Source: Macrobond, ING None of this is exactly a winning formula for higher interest rates.
Yet markets are still pricing at least two more hikes from both the ECB and the Bank of England. Policy rates one year from now are still expected to be roughly a full percentage point higher than they were before the war began. The hawks would point at growth.
Confidence has recovered, the Purchasing Managers' indices (PMIs) look solid. But ask yourself why. Is Europe’s economy actually starting to run hot, implying that monetary policy is too accommodative – and even that the neutral rate sits above the 2-2.5% level commonly assumed?
That is a valid debate in the US, with its AI boom and seemingly unstoppable stock market. But in Europe? Sure, you can point to things like Germany’s defence industry build-out.
And all that infrastructure spending too. Really, though, growth has surprised on the upside largely because inflation hasn't. It’s as simple as that.
Added to which, the war has actually helped Europe’s manufacturers, winning orders from Asian competitors more acutely affected by the closure of the Strait of Hormuz. That presumably won’t last. The ECB can legitimately hike rates in September, particularly against a backdrop of rising natural gas prices.
But anything more than that, as my colleague Carsten wrote this week , would take it into restrictive territory without a compelling reason for doing so. And here in Britain, I don’t think it’s going to be long before we’re talking about the first rate cut. Six months ago, I – and many others – argued that this wasn’t 2022 all over again.
Now, we finally have some data to prove it. James Smith THINK Ahead in developed markets United States (James Knightley) Jobs Report (Fri): The jobs report is the big event of the week and will be a key determinant of whether the Fed hikes rates on 16 September. The jobs numbers had shown renewed signs of life between March and May, but those gains have subsequently been trimmed back by revisions, while June was a disappointing 20k and July saw an outright fall.
We expect a modest recovery of perhaps 65k in August, but the low-hire, low-fire narrative persists. Tariff-related caution and higher borrowing costs are likely to keep that in place for the rest of the year. Unemployment Rate (Fri): The unemployment rate has remained surprisingly low, but this is down to steep falls in the participation rate with significant numbers of people leaving the workforce.
This is partly demographic-driven, but also likely reflects some disillusionment given the lack of hiring in the economy. ISM Manufacturing PMI/ISM Non-Manufacturing PMI (Tue/Thu): We also have the widely watched ISM business surveys, which are currently at levels historically consistent with the US economy growing in the region of 2-2.5%YoY. We don’t expect any major changes to this situation.
We will also see the Federal Reserve’s Beige Book, which is the anecdotal survey on the state of the US economy and has historically had an important influence over Fed decisions. Consequently, we will pay close attention to their inflation assessment. Eurozone (Bert Colijn) Inflation Rate (Tue): For the eurozone, the inflation rate for August is the most important indicator for next week.
With energy prices having risen again, headline inflation is set for another increase. But the central bank focus will be on core inflation. The PMI showed a surprisingly benign picture.
Despite more upbeat growth figures and rising energy prices, businesses indicated slower growth in input and selling prices in August. If we do see a jump this month, that will be another hawkish sign for the ECB. Unemployment Rate (Tue): Also out next week is the unemployment rate.
Not necessarily market-moving, but it will provide information on how wage growth will develop in the months ahead. We’ve seen an uptick in wage growth recently, which has surely been noticed by the ECB. While worries about a wage-price spiral would be premature, continued labour market strength will add to wage pressures in the months ahead.
Key events in developed markets Source: Refinitiv, ING "> Source: Refinitiv, ING Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Inflation European Central Bank Bank of England Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In this opinion Six months of the Iran War in six charts THINK Ahead in developed markets Author James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England.
He graduated from the University of Bath with a degree in economics and joined ING in 2015.