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What Lane means by a “second wave” of the energy shock
In an interview published by the ECB on 22 September 2026, Lane described energy prices rising in March and April, easing over the summer after a US-Iran memorandum of understanding, and then rising again. His 5 October keynote characterized the renewed increase in oil and gas prices as a second wave of the supply shock.
In September, Lane said the shock was expected to last longer than anticipated in March. He said inflation was likely to remain higher for longer before falling back toward the ECB’s target from mid-2027. That was his description of the outlook at the time, not a guaranteed result or a forecast for interest rates. Read the ECB’s 22 September interview with Lane.
In the keynote, he stressed that the shock’s size and duration depend on geopolitical developments, so the outlook could change. He described the second wave as creating both upside risks to inflation and downside risks to growth. Read the keynote text reproduced by Mondo Visione.
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Why higher energy prices can raise inflation and weaken growth
Energy prices feed into inflation directly, but a supply shock can also squeeze households and businesses. More expensive imported energy can raise costs for energy-using firms and reduce households’ real incomes. Firms may see profits fall; households may save more cautiously; and businesses may delay investment. Tighter credit and financial conditions can add to the pressure. These channels can reduce activity and demand even as the initial energy-price increase pushes headline inflation higher.
That is why Lane’s analysis considers both the direct rise in energy prices and the possibility of wider effects. If more expensive energy is passed through to food, goods, wages or services, inflationary pressure may become broader. If instead lost income, lower profits and postponed spending weigh heavily on demand, the shock may also restrain medium-term inflation. The balance between these effects matters for monetary policy.
What the ECB projections say—and what they do not
Lane cited the ECB’s September 2026 staff projections for non-energy inflation: 2.3% in 2026, an average of 2.6% in 2027, and 2.3% in 2028. These are projections, not observed outcomes. Lane said the projected rise was primarily due to lagged pass-through from the energy-price level shock, with smaller contributions from activity, administered prices and indirect taxes also noted in the keynote. These figures refer to non-energy inflation; they are not the same as headline inflation or a measure of underlying inflation.
A separate interview dated 1 October and republished on 6 October adds a caution about interpreting the ECB’s scenarios. Lane said energy prices were above the baseline, but each scenario combines assumptions about oil, gas and second-round effects. He cautioned against treating a scenario label as a definitive description of the present situation. He also said second-round effects had not been very strong so far and that pass-through remained uncertain. Read the Ansa interview transcript republished by LEI Enregistrement.
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What Lane’s measured approach means for interest rates
Lane did not announce a specific next rate move. He said future decisions should be made meeting by meeting, using a broad assessment of inflation deviations, evidence that a relative-price shock is turning into broader inflation dynamics, and whether channels that destroy demand are operating. As he put it in the 5 October keynote: “However, we are not on a pre-committed rate path.”
In practical terms, his framework points to several questions for policymakers:
- How persistent is the shock? Are oil and gas prices likely to stay elevated, or do market expectations point to a later reversal? Geopolitical changes could alter the outlook.
- Is the price pressure spreading? A rise in energy prices is not by itself proof that inflation across other goods and services is accelerating. The ECB needs evidence about pass-through and broader price dynamics.
- How much is demand weakening? Lower real incomes, reduced activity, delayed investment and tighter financial conditions can counter some of the direct inflation pressure.
- What do incoming data show? The outlook is conditional, and Lane said it could be revised as the evidence changes.
This is the logic behind a measured response: assess how the shock affects both inflation and activity, rather than infer a rate decision from the energy-price increase alone. The keynote’s argument is Lane’s personal assessment; it should not be read as a formal Governing Council decision.
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