Forget interest rate cuts – there’s an inflationary shock coming

Core Viewpoint - TS Lombard indicates that an inflationary shock is anticipated due to the ongoing war in the Middle East, but the economic impact is expected to be less severe than the oil shocks experienced in the 1970s [1][6]. Oil and Natural Gas Price Impact - World market oil prices have increased by approximately 50%, while natural gas prices have risen even more, with increases of 60% in Europe, 90% in the UK, and less than 15% in the US [2]. - The energy-price component of the Consumer Price Index (CPI) will be affected, but the passthrough effect is estimated to be around 20-40%, indicating that the energy component is less volatile than the underlying commodities [2][3]. Contribution to Inflation - The contribution of oil and natural gas prices to the CPI includes transportation energy and electricity generation, with around 40% of electricity coming from natural gas, which will eventually add to inflation [3]. - In a scenario where oil prices spike to $150 per barrel, the impact on general prices could be an increase of 1.5-2.0 percentage points, which, while not catastrophic, would still pressure real incomes and complicate central bank policies [5]. Central Bank Responses - Central banks that were planning to maintain interest rates in 2026 are likely to continue with that strategy, while those considering rate cuts, such as the Bank of England, face significant challenges due to inflation exceeding targets [7]. - Current expectations suggest that all rate cuts have been postponed as central banks navigate the inflationary environment [7]. Implications for Automotive Markets - The developments in the Middle East are expected to negatively impact global economic growth, leading to increased price inflation and interest rates, which will dampen consumer and business confidence [8]. - Any decline in economic growth will adversely affect demand in automotive markets, impacting profitability across supply chains, as higher inflation and interest rates will influence purchasing decisions and finance costs [9].