During a recent speech that was reportedly delivered on 2 June 2026 at the University of Derby Business School, Bank of England Deputy Governor Megan Greene highlighted the challenges posed by the latest energy price surge triggered by conflict in the Middle East. Titled “Here We Go Again? Assessing the Inflation Risks of the Recent Energy Shock,” her address draws parallels with past disruptions while stressing the need for vigilance against persistent inflationary pressures.
Greene opened by acknowledging the human tragedy of the US-Iran conflict before turning to its macroeconomic consequences.
The effective closure of the Strait of Hormuz as well as ongoing attacks on energy infrastructure have driven sharp rises in oil and gas prices.
Even if hostilities cease quickly, the effects will linger for months due to damaged infrastructure and heightened risk premiums.
As a classic negative supply shock, this development simultaneously boosts inflation and dampens economic activity, forcing central banks into a difficult trade-off between price stability and supporting growth.
The speech emphasizes that not all energy shocks are alike. Their persistence depends heavily on “second-round effects”—the feedback loops where higher inflation expectations alter wage- and price-setting behavior.
Direct pass-through of fuel and utility costs appears swiftly but fades. Indirect effects through supply chains last longer.
Real income losses from higher energy prices typically weigh on demand and thus inflation. However, second-round effects prove most durable and policy-relevant.
These effects operate through two main channels. Households facing rising costs demand higher wages to protect living standards, while firms, seeing elevated inflation expectations, raise prices beyond immediate cost increases to safeguard margins.
Inflation expectations act as a critical amplifier. Households often prove “rationally inattentive” to inflation during stable periods but become highly sensitive when it spikes, especially to salient items like petrol. Media coverage intensifies this response.
Recent Bank analysis shows that high media attention on energy prices can boost household inflation expectations by nearly 3 percentage points in the short term.
Greene contrasted the current situation with two prior episodes. The 2011 shock, linked to unrest in the MENA region, saw energy prices rise but produced limited second-round effects.
Headline inflation increased modestly, wage growth remained subdued, and the labor market featured substantial slack following the Global Financial Crisis. Firms passed on some costs but could not sustain large margin expansions amid weak demand.
By contrast, the 2022 shock after Russia’s invasion of Ukraine triggered far more persistent inflation.
A massive gas price surge—amplified by the UK’s reliance on gas for electricity pricing—combined with a tight labour market and already elevated inflation expectations. Workers bargained for higher wages, feeding back into firm costs and creating a “battle of mark-ups.”
This necessitated aggressive monetary tightening.
For the 2026 shock, the picture appears mixed but tilted toward caution. Oil prices have risen notably but remain below previous peaks in real terms, while gas prices exceed 2011 levels though fall short of 2022 extremes.
The economic backdrop shows a labor market looser than in 2022 but tighter than in 2011, with moderate slack.
Household inflation expectations jumped sharply post-outbreak before partially moderating, and firms’ price growth expectations have also climbed. Media coverage of energy issues currently exceeds 2022 levels, heightening sensitivity.
Greene noted that conclusive evidence on second-round effects will take time, as many wage settlements predate the shock.
Policymakers must therefore exercise judgement, acting preemptively given monetary policy lags. Successive supply shocks may have left the economy more prone to de-anchoring of expectations.
While slack can help absorb the shock by curbing demand, proactive policy may be warranted to prevent entrenched inflation. Greene’s analysis underscores that energy shocks have become a recurring feature of the economic landscape.
The Bank of England will now aim to effectively monitor incoming data on expectations, wages, and pricing behavior. With inflation already under scrutiny, this latest update from the BoE reinforces the importance of a data-dependent approach to maintain price stability in an increasingly uncertain global environment.