As tensions involving Iran persist, crude oil and natural gas prices are expected to remain elevated, affecting monetary policy in Japan, the US and Europe. The speed at which inflationary pressures pass through differs by region.
Crude oil and natural gas prices have remained elevated as tensions involving Iran persist. Crude oil prices generally move in tandem across Japan, the US and Europe, while natural gas prices vary significantly by region because of differences in market structure. Crude oil prices are expected to decline gradually once the Strait of Hormuz returns to normal, although risks arising from supply constraints remain.
Higher commodity prices are rekindling inflationary pressures in each region, while the speed at which price increases pass through to consumers differs. Pass-through is proceeding relatively quickly in the US, is slower and more prolonged in Japan, and falls between the two in the euro area.
In Japan, higher costs are being passed through to food and daily necessities, and inflation is expected to accelerate again in early 2027. The Bank of Japan is shifting its focus from achieving 2% underlying inflation to sustaining it, and is expected to continue raising rates in stages later this year and beyond.
In the US, headline and core inflation are moving higher against a backdrop of solid domestic demand and employment. The FRB is expected to raise rates again in December, with interest rates likely to remain high in 2027 as well. In Europe, price increases caused by higher commodity prices are continuing, but second-round effects remain limited for now. The ECB is expected to raise rates again in December, although rising long-term interest rates and fiscal concerns leave the outlook uncertain.