The rise in energy prices lengthens the fight against inflation! Has US producer inflation exceeded expectations, and the ECB raised interest rates again to prepare for a strangling situation of high volatility?

The Zhitong Finance App learned that the latest US producer inflation data PPI and the ECB resolution on the evening of September 10, Beijing time, jointly highlight the continued restrictions on the loose or neutral monetary policies of central banks around the world due to the sharp rise in oil and gas energy prices against the backdrop of continued deterioration in the geopolitics of the Middle East. As energy inflation sounded another wake-up call, European and American market traders re-examined interest rate caps one after another. The ECB announced a 25 basis point rate hike, as expected by the market, raising the deposit mechanism interest rate to 2.50%. The core signal released by the ECB is that inflation is falling more slowly, and the economy's ability to withstand interest rate hikes is stronger than ECB officials had previously agreed.

Compared with the economic forecast summary released earlier in June, the inflation forecast given by the ECB remained at 3.0% for the full year of 2026, and the upward revisions were concentrated in 2027 and 2028; the economic growth forecast for the same period also improved, which can be described as reserving room for further interest rate hikes, but the central bank continues to emphasize meeting by meeting decisions, and subsequent interest rate hikes in market pricing are not policy promises.

The US final demand PPI rose 0.4% month-on-month in August, in line with the financial market's unanimous expectations shown in pre-market reports; the year-on-year producer inflation index surpassed expectations by 5.4%, slightly higher than the 5.3% forecast, so it is accurately described as “slightly exceeding expectations on a year-on-year basis.” Among them, energy prices rose 4.2% month-on-month, and diesel prices soared 24.1%, indicating that the impact on fuel supply, which originated in the US-Iran war and is becoming more intense, is driving up production and transportation costs.

However, after excluding food, energy, and trade services, PPI rose 0.3% month-on-month, down from 0.4% in July. Although it is not yet possible to assume that all price pressure is accelerating based on this, traders have absorbed hawkish expectations that the Fed will start raising interest rates in October with a probability of returning to interest rate hikes after the PPI was announced. The yield on US 30-year Treasury bonds rose to around 5.34% after the PPI was announced, reaching the highest level since 2007. The Nasdaq 100 stock index futures, which can be called the title of technology stock trend, fell directly over 1%. A collective decline.

The flames of war in the Middle East are written into the interest rate table: the ECB takes another step

The ECB raised interest rates for the second time since the war began in Iran in February to respond to signs that inflation may continue to be significantly above 2%.

Deposit interest rates rose 0.25 percentage points to 2.5% on Thursday, in line with almost all economists' predictions in the Bloomberg survey. The ECB has reiterated that it will not promise follow-up actions in advance, but will make decisions at each meeting based on data released one after another.

European interest rate futures traders believe that the ECB will take more action and increased their bets after the announcement. Currently, it is expected that interest rates will be raised three more times until October 2027.

The ECB said in a statement: “The Middle East conflict continues to generate inflationary pressure, and inflation is expected to be significantly higher than the target level for a long period of time.” “The outlook remains highly uncertain. Inflation faces upward risks, while economic growth faces downside risks.”

Surging energy prices have pushed inflation to its fastest level in nearly three years, and Thursday's actions put Eurozone policymakers further ahead of other major central banks in dealing with this shock. Traders expect the ECB to take more action, and the market has taken into account expectations of two more rate hikes until mid-2027.

The picture above shows the central bank's observation — that is, the benchmark change trajectory of central bank borrowing costs around the world since this year. Note: The data shown on the map reflects the interest rate changes of each central bank since the beginning of 2026.

This is in contrast to the Federal Reserve and the Bank of England. The latter two have yet to tighten monetary policy due to the war in the Middle East, and may remain on hold next week.

The ECB's decision is based on the latest forecast: the average inflation rate this year was 3%, then fell to 2.5% in 2027 and 2.1% in 2028. Due to the marked acceleration of economic growth in the Eurozone in the second quarter, the full-year economic growth forecast was raised to 0.9%.

The picture above shows the latest inflation and economic growth forecasts announced by the ECB.

ECB President Christine Lagarde will face questions from reporters at 2:45 p.m., in Berlin. Rumors about her possible early departure continue. The ECB meets once a year outside of its headquarters in Frankfurt. This year's venue is Berlin.

As oil prices reached $100 per barrel, European gas prices rose to levels not seen since the winter after Russia invaded Ukraine, and consumer prices in the Eurozone, which consists of 21 countries, rose 3.3% year on year in August.

There are, however, some more encouraging signs: underlying inflation and a much-publicized service price indicator have all declined, and wage pressure has eased.

As shown in the chart above, energy is driving inflation in the Eurozone to its highest level in three years — underlying price pressure and service inflation have declined somewhat. Source: Eurostat.

These changes should help ease the concerns of some officials. They argued at the ECB's July meeting that it may be necessary to adopt a “moderate and restrictive” policy stance in order to return inflation to the target. To reach this level, deposit interest rates need to rise above 2.5%; 2.5% is the upper limit of the neutral interest rate range that the market generally believes will neither stimulate nor suppress economic activity.

Lithuanian member Gediminas Simkus of the ECB Governing Council has said that it is unlikely that the ECB will end interest rate hikes after this week; his Bulgarian colleague Dimitar Radev said there is still a possibility of action at the December meeting.

The unexpected resilience shown by the economy may facilitate further policy tightening. Eurozone economic output increased 0.6% month-on-month in the second quarter after Ireland's data was drastically revised; at the same time, digital investment and government spending on infrastructure and military sectors drove the manufacturing industry to expand at the fastest pace in more than four years.

Moody's Analytics Eurozone Economic Research Director Camille Kowal said that the ECB acknowledged unexpectedly strong economic performance while predicting higher inflation. These factors “show that the Governing Council is open to further interest rate hikes and increase the possibility of a third rate hike. Even if energy prices fall from this week's level, we currently think the probability of a third rate hike is 50%.”

Inflation drags on the front line: stock valuations are tested by cash flow

As far as European inflation expectations are concerned, the interest rate hike is mainly aimed at preventing energy shocks from continuing to spread through corporate pricing, wage negotiations, and inflation expectations. Interest rate increases play a role by restraining credit and demand, and have limited effect on improving the oil and gas supply itself.

Therefore, the effectiveness of the ECB's monetary policy depends on whether energy price increases can be limited to a small range. The current easing of underlying inflation and wage pressure provides conditions for gradual adjustments; the 2027-2028 core inflation forecast is revised, which indicates that the central bank is still worried that cost transmission is lagging behind.

As far as the European economy is concerned, the increase in growth forecasts has increased the central bank's policy space to continue fighting inflation, but the 0.6% increase in the second quarter includes the impact of Irish data revisions, which cannot be understood entirely as an overall strengthening of consumer consumption and corporate demand. Higher energy prices reduce actual purchasing power, and interest rate hikes raise housing and corporate financing costs. Both will still collectively drag down domestic demand; investment in digitalization, infrastructure, and defense provides some support. As deduced from this, Europe is more likely to experience fragmentation in industry performance. Whether enterprises can pass on costs, maintain orders, and control liabilities is more investment meaningful than just looking at an increase in economic growth.

As far as investment strategies in the global stock market are concerned, it has undoubtedly continued to increase market concerns about the continued rise in inflation and even stagflationary pressure due to worsening global tariffs, geopolitical deterioration, and the global stock market moving towards another round of sharp fluctuations — the combination of this latest set of inflation and ECB interest rate hikes and the central bank's economic outlook summary data can be described as increasing the need to test valuation and financing costs: if inflation continues to force interest rates to stay high, companies that rely on forward profits, highly leveraged expansion, or frequent refinancing of assets and liabilities will be under more pressure. The companies on the table are more comparable advantages.

Energy producers are likely to benefit from rising prices, while aviation, transportation, and energy-intensive manufacturers are testing their ability to pass on costs. The fact that the US PPI slightly exceeded expectations year over year also increased the importance of subsequent CPI, but neither the single-month PPI nor the ECB interest rate hike alone are sufficient to determine the Federal Reserve's next step; in particular, the current European interest rate hike has been widely anticipated, and the subsequent market depends more on how interest rate paths and profit forecasts change.

However, there is no doubt that the shift from highly concentrated AI/US growth stock trading to the accelerated spread of portfolios that “retain structured AI longs+increase low correlation, high cash flow, and undervalued assets” is an alpha investment strategy combination that Wall Street strategists have consistently proposed in the context of rising inflation and continued rise in US bond yields — that is, the AI computing power theme from leveraged positions reaching historically extreme levels and high-beta momentum trading with extremely high position congestion.

After the AI bull market entered the “high valuation+high congestion+high capital consumption” stage, a team led by Bank of America senior strategist Michael Hartnett (Michael Hartnett), who has the title of “Wall Street's Most Valuable Strategist,” published a research report arguing that marginal capital should shift from the most expensive AI computing power beta to “cheaper profitable growth, real cash flow, and anti-inflationary assets” — this is a rebalance that spreads from a single technology main line to the profit and high-quality cash flow sector of the entire market, rather than the end of the AI bull market.