Energy Inflation in the Eurozone Is Spilling Beyond the Energy Sector

There is another, more worrying development. Price increases are beginning to spread through the rest of the economy. Inflation in services and food has accelerated, and core inflation—which excludes the most volatile components—has risen.

Economists call these second-round effects. Expensive energy raises producers’ costs, which they pass on to prices, while workers respond by demanding higher wages. The first signs of this cycle are already visible. According to Indeed, salaries offered in job postings are rising considerably faster than before the conflict began. If this spiral takes hold, a one-off energy shock will turn into persistent inflation, which is much harder to bring under control.

The economy is developing unevenly. Industrial activity is at its highest level since 2022, but it is being supported by orders for AI infrastructure equipment and by the defense sector—in other words, by investment and government demand. The consumer sector is weakening. Households are cutting spending as the cost of living rises. The picture resembles that of the United States: headline indicators are growing while citizens’ well-being is deteriorating.

The ECB has already raised its rate twice this year, to 2.65%. It faces a difficult choice: tighten policy further and risk stifling weak consumer demand, or wait and allow inflation to become entrenched.

What does this mean for Russia? High global energy prices support export revenues for the Russian budget, although the European market for Russian commodities is largely closed. At the same time, rising prices in Europe and Asia make imported equipment and components more expensive, including goods brought in through third countries. This adds to inflationary pressure on Russia from abroad.

Author: Candidate of Economic Sciences, Associate Professor, Department of World Economy and International Finance, Financial University under the Government of the Russian Federation, Tatyana Aleksandrovna Gorbacheva.