Markets price in sustained inflationary pressures through 2027 due to prolonged Middle East conflict impacts on energy costs.
The European Central Bank’s April meeting highlighted persistent inflation risks from elevated oil prices linked to Middle East tensions. Markets anticipate a notable inflationary impact extending into 2027, with inflation fixings rising for both 2026 and 2027 before a projected return to the 2% target in 2028.
Despite the inflation concerns, financial markets expect economic resilience. Risk assets, including equities and corporate bonds, have rebounded to pre-conflict levels, while earnings expectations have been revised upward. The euro’s exchange rate also stabilized near earlier levels.
Volatility remains elevated, driven by uncertainty over the duration of the oil price shock. The ECB noted that while upside risks have moderated, oil prices remain significantly higher than pre-war levels, suggesting prolonged inflationary pressures.