The ECB raised rates by 25 basis points; U.S. August PPI slightly exceeded expectations; the market’s probability of a Fed rate hike in September has risen to 70%. How should we interpret this set of macroeconomic data?

Interpreting this set of data merely as 'the ECB hikes, U.S. PPI runs hot, so the Fed may follow suit' captures only the surface. What truly warrants attention is that the dominant narrative markets have been pricing in for the past year—namely, inflation easing, central banks cutting rates, and interest rates declining—is now being disrupted anew. Half a year ago, markets were debating how many times the Fed might cut rates over the year; today, the debate has shifted to whether it will hike again in September. The ECB has already acted first; U.S. long-term Treasury yields are once again approaching 5%, the dollar is strengthening, and gold is under pressure. Though these appear to be separate news items, they all stem from the same underlying question: With energy prices rising again, could global inflation face a second wave? The real shift isn’t that one central bank hiked by 25 bps—it’s that markets are beginning to doubt whether the anti-inflation cycle, previously thought to be nearing its end, may in fact not yet be over. The ECB’s latest hike illustrates this most clearly. It raised its key policy rate by 25 bps, lifting the deposit facility rate to 2.50%. The puzzle lies in the fact that the European economy isn’t strong enough to warrant tightening to ‘cool down’ demand. Growth remains modest at best; neither manufacturing nor household consumption shows signs of overheating. What’s forcing the ECB’s hand is renewed upward pressure on inflation expectations following the rebound in energy prices. This echoes conditions seen in 2022–2023: surging oil, natural gas, and transport costs squeezed corporate profits first, then fed through to goods and service prices, prompting wage demands from workers. If this full transmission chain plays out, an external energy shock could morph into persistent core inflation—difficult to tame for years. So the ECB faces a difficult choice. Raising rates won’t boost oil production or eliminate geopolitical risks; instead, it raises corporate financing costs, mortgage burdens, and government debt servicing costs. Yet it fears an even costlier outcome: if markets perceive the central bank as tolerating inflation above 3%, households and firms may gradually accept ‘permanently higher prices’—and anchoring inflation expectations back down later would then require far greater sacrifice. Put simply, this hike isn’t driven by an overheating European economy—but by the ECB’s determination to avoid letting inflation expectations derail again, even at the cost of some growth. The U.S. situation is more complex. After the release of August PPI, markets’ immediate reaction was ‘inflation is heating up again’. But rather than viewing the PPI broadly as exceeding expectations, what truly alarmed markets was its internal composition. Rising energy and commodity prices were unsurprising; what mattered more was that transport costs, healthcare services, and airfares—all key inputs feeding into subsequent PCE inflation—showed no meaningful cooling. This suggests the Fed’s concern may now extend well beyond ‘gasoline getting pricier’. A short-lived oil spike alone wouldn’t compel the Fed to act—the Fed knows monetary policy cannot solve supply-side shocks. But if rising oil prices begin transmitting through transport costs, corporate pricing power, and service-sector inflation all the way to core PCE, the nature of the problem changes entirely: an energy shock would evolve from a one-off price jump into genuine second-round inflation. Meanwhile, the U.S. labor market hasn’t weakened enough to force the Fed toward dovishness. If employment deteriorated sharply, the Fed would naturally prioritize recession risks. But with the economy still showing resilience—and inflation re-emerging—the Fed retains both justification and room to maintain high rates, or even deliver another hike.

Why is the ECB hiking rates against the global trend of rate cuts?

Why has energy surged so sharply? Escalating Middle East conflict has pushed international oil prices above $100 per barrel—the highest since May 2026. Europe relies heavily on imported energy; when oil prices rise, electricity, transport costs, and chemical feedstock all follow suit, ultimately feeding directly into consumer prices. Core inflation—excluding energy and food—remains relatively moderate at 2.4% in August, while food inflation stands at just 1.2%. The entire problem hinges on this single pillar: energy. III. Textbook logic says ‘cut rates’—so why hike? Second rate hike this year: deposit rate raised to 2.50%, main refinancing rate to 2.65%, marginal lending facility rate to 2.90%. According to textbook macroeconomic logic, weak growth calls for rate cuts to stimulate the economy—making the ECB’s move indeed ‘anomalous’. Yet the central bank’s mandate is clear: its top priority is never growth, but price stability. For the ECB, the statutory target is to bring inflation back to 2%. Currently, inflation stands at 3.3%—over one percentage point above target—and forecasts indicate it will remain above target for at least three years. There is simply no room for rate cuts. That’s why President Christine Lagarde repeatedly stressed ‘inflation stickiness’ after the meeting: ongoing geopolitical tensions continue pushing up energy prices, sustaining persistent upside pressure on prices. She also emphasized that the ECB does not pre-commit to any interest-rate path—each decision will be assessed meeting-by-meeting. Incidentally, this hike is widely seen as increasing the likelihood of further hikes by other major central banks—including the Fed. Global monetary policy is being pulled off its ‘synchronized easing’ track—by energy alone. IV. Can growth of 0.9% withstand a rate hike? ECB upgrades growth forecast to 0.9% for 2026, 1.4% for 2027; unemployment at 6.4% provides confidence. There are, of course, costs. Higher rates raise financing costs, which—in theory—suppress investment and consumption. The ECB’s own forecast projects euro-area GDP growth of 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. Yet there’s a counterintuitive twist: the ECB has revised up its growth forecasts for both 2026 and 2027, citing stronger-than-expected economic resilience. The economy weathered the energy shock in Q2; manufacturing held up thanks to defense and infrastructure spending, consumer confidence bottomed out and rebounded, and services recovered accordingly. The labor market remained solid too: unemployment held steady at 6.4% in July—a historically low level. Stable employment underpins household consumption, giving the ECB the confidence to hike. Of course, risks are clearly acknowledged: upside risks to inflation, downside risks to growth. How long this delicate balancing act lasts depends not on interest rates themselves—but on oil prices. V. What does this mean for us? Three transmission channels. Ultimately, the bill for rate hikes lands on consumers: energy prices transmit via chemicals, transport, and manufacturing into global prices—landing squarely on everyday expenses. First channel: exports. The euro area is a major export market for China. Higher European interest rates and weakening domestic demand will pressure Chinese export orders and pricing to Europe; conversely, if European manufacturers suffer under soaring energy costs, some production capacity may relocate overseas—creating new industrial opportunities.

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