European Economics Quarterly The doves of peace?

Research evidence excerpt

European Economics Quarterly The doves of peace?

Economics ● Europe

Q3 2026

Executive summary

The doves of peace?

Energy price falls mean a lower peak in inflation…

The mid-June deal between the US and Iran sent energy prices and futures curves sharply

lower. For our base case, we assume that energy prices follow futures. This means that we

forecast inflation to peak significantly lower than we assumed in our mid-May forecast update.

Specifically, our base case is now for eurozone inflation to average 2.9% this year and 2.2% in

2027 (below the 3.3% and 2.4% projected in May update, but close to the base case we had

three months ago). In the UK, we expect CPI inflation to rise to about 3.6% y-o-y by November

2026 and stay there until March next year. It should then start to come down quite quickly

towards the BoE’s target, ending 2027 at 2.3%.

...which should mean smaller indirect effects and risks of second-round effects on wages

Lower energy inflation should also reduce both the indirect energy effects and risks of a second-

round impact on inflation expectations and wages. Indirect effects tend to show up in food

inflation first, though they usually take a year to feed through fully. So far there has been little

impact on food prices, though it is too early to draw firm conclusions. And the falls in energy

prices have already fed through to business surveys of pricing actions.

Underlying growth in Q1 was robust and business surveys indicate cyclical resilience…

The energy shock hit consumer confidence hard and leading indicators of business activity fell.

But they have not plunged to deeply depressed or recessionary levels. So, given that the world

economy has experienced one of the biggest disruptions to oil markets in history, the impact