Schnabel Warns of Sticky Core Inflation, ECB Rate Path Faces Growing Divergence
Claire Weston
ECB executive board member Isabel Schnabel warned that core inflation momentum remains strong and natural gas prices are still ~40% above pre-war levels; Belgium's Pierre Wunsch countered that the shock is fading — the hawk-dove split leaves the rate path uncertain.
Oil prices fell — why does Schnabel say "we're not back to pre-war"?
Schnabel told a Rome forum that Middle East peace efforts have pushed energy prices lower, but the peace deal remains fragile and markets still price in higher oil over longer horizons.
Natural gas prices are still ~40% above pre-war levels; pipeline and supply-chain stress persists, and energy inventories need restocking.
This means → the oil-price drop is surface relief. Supply-side cost pressure has not actually faded — businesses and consumers still face elevated prices.
Why is core inflation harder to bring down than headline inflation?
Headline eurozone inflation has retreated from its peak, but core inflation — price changes excluding energy and food, a better gauge of underlying pricing pressure — has barely budged by comparison.
In plain terms = petrol is cheaper, but eating out and hiring a plumber still cost more every month. That stickiness is what core inflation measures.
Schnabel flagged three new risks: European heatwaves, low Rhine water levels, and the AI investment boom, all of which she says are sustaining global demand and adding to inflation pressure.
Why does Wunsch disagree?
Belgium's central bank governor Pierre Wunsch, speaking at the same event, said this round of shocks appears to have faded and oil and gas prices could return to — or fall below — pre-shock levels relatively quickly.
His core logic: if second-round effects — the chain reaction where energy price rises feed into wages, then into broader goods prices — fail to materialise before the root shock disappears, monetary policy needs no significant further tightening.
This reflects a stark internal split at the ECB: Schnabel sees risks that haven't faded; Wunsch sees a shock that is fading.
What is the market betting on?
With oil prices still falling and inflation cooling faster than expected, traders have trimmed bets on further rate hikes this year.
This means → the market has moved closer to Wunsch's camp — pricing in a tightening cycle near its end.
But Schnabel's warning cuts against that consensus: if core inflation data refuse to fall — or rise — in the coming months, markets may be forced to reprice. Whether the hawk-dove split narrows as new data arrive is the key variable for the rate path ahead.
Content is for reference only, not financial advice.