With the Middle East conflict now entering its second month, high energy prices have produced knock-on effects across global financial markets. The US and European breakeven curves surged as markets repriced inflation expectations and the likelihood of central-bank rate cuts. Nominal yields, particularly at the short end, also rose sharply in countries including the UK. At this stage, some of this reaction seems excessive to us. We think the length of time that energy prices remain high will determine the second‑round inflationary effects.

On the growth front, markets do not appear overly concerned at present. We believe persistently high energy prices would weigh on consumption and growth. Overall, this crisis is generating stagflationary pressures across the global economy. Our main convictions are outlined below:

• The impact on inflation will vary across regions, with the eurozone (EZ) likely to be more affected than the US. Whether inflation is transitory depends on how long prices for oil, gas, food and fertiliser remain elevated. Eurozone CPI could spike substantially above the ECB’s target in 2026 before subsiding the following year — albeit still above target. This would occur if inflationary pressures become embedded across the economy, for example in intermediate goods, freight and insurance costs. In the US, we expect high energy prices to hit lower‑income households harder. 

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