Core inflation risks in the aftermath of the Hormuz closure

Summary

The escalation of tensions in the Middle East and the subsequent closure of the Strait of Hormuz raise concerns about renewed inflationary pressures in the euro area. This policy brief assesses the implications for core inflation risks using a Quantile Regression Forest (QRF), a non-linear machine-learning model. We find that upside risks to core inflation increased sharply following the outbreak of the war, reaching their highest levels in April and May 2026. The increase was driven mainly by firms’ short-term selling price expectations, while wages and other indicators of more persistent inflation pressures remained comparatively muted. Yet, broader underlying pressures may take longer to feed through, particularly via slower-moving channels such as wage-setting, firms’ pricing decisions and cost pass-through.

Highlights

Highlight 1
Core inflation risks rose sharply following the closure of the Strait of Hormuz
Following the closure of the Strait of Hormuz, upside risks to euro area core inflation increased markedly and peaked in April and May. They subsequently moderated in June and July as geopolitical tensions eased and increased again slightly in August.

Highlight 2
Machine learning reveals what drives risks beyond the central inflation outlook
The Quantile Regression Forest captures upside and downside risks and helps assess the effects of rare events that conventional forecasts may overlook. Decomposing the model’s results shows that firms’ short-term selling price expectations accounted for most of the increase in upside risks.

Highlight 3
Persistent inflation pressures remain contained for now
Wages and broader cost indicators have shown comparatively little response, providing limited evidence of second-round effects so far. However, renewed increases in energy prices could again raise inflation risks and underscore the need for continuous monitoring.