ECB Governing Council Member: Middle East Energy Shock Has Not Yet Transmitted to Wages, but Longer Conflict Raises Greater Risks
nashnova research
ECB Governing Council member Olli Rehn warned that the Middle East energy shock has not yet spread to wages, but the longer the conflict drags on, the higher the contagion risk — a dynamic that will shape the ECB's next rate decision.
Energy prices surged — why haven't wages followed?
Rehn stated clearly: the energy price spike triggered by the Middle East conflict has not yet spread to other prices or wages.
This means → the shock remains a "localized pain" — the wage-price spiral the ECB fears most has not ignited.
But he immediately cautioned: "These effects may emerge gradually and imperceptibly." Put simply = absence of evidence today is not evidence of safety tomorrow.
How long before the conflict hits a tipping point?
Rehn's core judgment: "The longer the Middle East conflict persists, the greater the risk that the energy price rise spreads more broadly."
In plain terms = there is a slow fuse between conflict and inflation — invisible in the short run, but over time energy costs seep into food, services, and eventually wages.
Since the war began, the ECB has raised rates twice, most recently in September, directly because the energy shock pushed inflation well above its 2% target.
Can the economy still hold up?
Rehn's assessment: the eurozone economy remains resilient but growth is still weak.
This reflects a dilemma — the economy hasn't collapsed, demand is reasonably firm, and that makes it easier for companies to pass costs on to consumers, which paradoxically raises the risk of broader contagion from energy to overall inflation.
A counterweight exists: rising long-term rates are dragging on growth, which in turn suppresses the pass-through from energy prices to wages. In plain terms = high rates act as both a fire extinguisher and a speed bump.
Why are long-term rates climbing too?
Finland's central bank identified four forces pushing long-term rates higher: the AI investment boom lifting capital demand + rising inflation expectations + climbing public debt + greater global uncertainty.
This means → even if the ECB stops hiking, the market itself is pushing borrowing costs up — the central bank's "accelerator" and the market's "automatic brake" are working simultaneously.
The key variable to watch: whether the energy shock ultimately transmits to wages — that will determine whether the ECB keeps hiking or holds steady.
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