Demand or supply-driven? How firms view inflation right now

ECB staff blog arguing the Feb-Jun 2026 inflation jump from 1.9% to 2.8% is cost-push, not demand-pull, using earnings-call text mining, Financial Times narrative extraction and two BVARs on European Commission survey expectations. All three tools point the same way: supply narratives dominate, demand-pull pressures broadly stable, and business price expectations sit roughly two standard deviations below where they were after Russia's invasion. The policy line is that a supply-driven episode does not warrant the same forceful tightening as 2022, with the standard caveat on second-round effects into wages and expectations.

What’s new: The framing is not new: Lagarde and the Governing Council have already leaned on the look-through-supply-shocks logic and the June 2026 Arce et al. blog made the initial-conditions argument. What is new is the evidentiary base. Staff explicitly say no hard-data euro area comparison of this episode to 2022 exists yet, and they quantify the gap: price expectations about two standard deviations below the 2022 peak, cost-push shocks concentrated in energy-intensive manufacturing, demand expectations flat. That is a staff-level justification for not responding to the 2.8% print.

KEY FINDINGS

• Headline moved from 1.9% to 2.8% year on year between February and June 2026 on the Middle East oil shock, but the structural decomposition attributes the rise to materials supply shortages with demand-pull pressures broadly stable. Gives the Council cover to look through a print that is nearly a point above target, arguing against any hawkish repricing on the headline alone.
• Business price expectations in 2022 stood about two standard deviations above the current level, and demand-pull dominated then while cost-push dominates now. Explicitly rules out the 2022 analogy that would otherwise justify a rapid tightening cycle.
• Cost-push shocks are concentrated in manufacturing, particularly chemicals, refined petroleum and paper, while services, at 71% of the composite weight, is not flagged as a source of pressure. Narrow, sector-specific pass-through is the profile least likely to become broad-based, supporting patience.
• Firms' attention to inflation and inflation risks has intensified but remains below March 2022 levels, and their demand expectations have remained flat. Low pass-through into expectations is the key condition the Council has set for tolerating a supply shock.
• The caveat is retained: supply shocks can become entrenched if they feed into wages or inflation expectations and add to demand pressures. Sets the trigger for a hawkish turn, which is wage data rather than headline energy inflation.

FROM THE DOCUMENT

Amid broadly stable demand-pull pressures, cost-push shocks drove up price expectations at the start of the war (panel a).

Demand-pull pressures dominated in 2022, whereas cost-push inflationary forces have played a comparatively larger role in the current episode.

A supply-driven inflation episode does not automatically call for the same forceful tightening that demand-pull inflation would warrant.

However, supply shocks can become entrenched if they feed more broadly into wages or inflation expectations and add to demand pressures.