The central bankers around the world may be attempting the impossible: to ​get into the psyche of business executives, labor unions and ordinary households in real time to try to understand how they are navigating their finances through what appears to be yet another major energy shock.

Policymakers are contemplating whether to jack up interest rates to combat rising inflation. But ⁠they will only pull the trigger if they think a surge in ⁠energy costs induced by the Iran war will filter into other prices, lifting inflation expectations across the entire economy.

The problem is that measuring such expectations is notoriously difficult. Central banks have a trove of surveys, gauges and indicators at their disposal, but all of them have blind spots if not ​outright faults.

Since the COVID-19 pandemic, they have developed new tools to fill gaps in data about behavior. But measuring ​expectations remains ⁠more of an art than an exact science.

That could raise the bar for rate hikes as policymakers are wary of gut-feeling decisions and usually prefer to wait for more evidence to narrow the risk of a policy error.

Behaviors have changed

Policy-makers at the Bank of Canada acknowledged that global uncertainty meant they “would need to rely on judgment more heavily than usual” to plot the path of the economy, according to minutes of its March 18 meeting at which it kept rates on hold.

Others describe the effort involved in the process.

“I try hard to get into the thoughts of price-setters and how they are seeing it – trying to calibrate their confidence in pricing power,” Richmond Federal Reserve Bank President Tom Barkin told Reuters.

“The ‘hike’ case would be around inflation expectations starting to finally move,” he said. “I don’t have a sense that they’ve broken out at this point.”

One complication is that behaviors change.

In 2022, consumers and firms had little experience with rapid inflation, making price- and wage-setting a rather rigid exercise.

“But now people have lived through a painful episode of inflation, and this may mean that inflation expectations are more fragile, and so they could ⁠be ⁠more sensitive to such an energy price shock,” European Central Bank (ECB) board member Isabel Schnabel said in a university lecture on Friday.

For companies, changing their selling prices was a cumbersome process before the pandemic and so they limited adjustments, often to once a year. This became untenable and the frequency of changes skyrocketed, Schnabel argued.

This makes the frequency and not just the magnitude of such changes a good indicator that expectations are shifting.

Traditionally, central banks relied on surveys and market indicators to assess expectations. But surveys are not done frequently enough to capture rapid changes and their time horizon is often out of sync with that of policymakers.

Market indicators of expected inflation are also imperfect because they include the extra return, or risk premium, that investors demand for holding a particular financial instrument. This changes with market sentiment, blurring shifts in actual price expectations.

The stakes are high: investors now expect the ECB to raise rates two or three times this year, the Bank ⁠of England (BoE) twice, and have given up on any Fed rate cuts in 2026.

Innovating to cover knowledge gaps

To compensate for such information gaps, central banks have developed an array of new tools. They track expected wage changes, including via major pay deals announced by unions, which may be a signal to others negotiating their own pay.

They survey firms directly and speak to ​executives to gauge expected behavior, and they take on board ever-larger numbers of external surveys with forward-looking indicators.

Central bank staff track the frequency of price changes, correct existing surveys ​to fill data gaps and have revised their own projection models to address shortcomings that missed 2022’s inflation surge caused by the pandemic and Ukraine war.

Also key to their judgment call is trying to understand how this inflation shock differs from four years ago.

The consensus on this seems firm: ⁠conditions are fundamentally different.

Interest rates ‌are already higher, ‌government purses are tighter, there is growing slack in the labor market, and – unlike during the pandemic, when they were ⁠unable to spend – households are not sitting on piles of cash.

“We’re coming into this situation with ‌the gradual disinflation that we were having, the labor market is softening (and) growth is a little bit below potential,” Bank of England Governor Andrew Bailey told Reuters.

“And one of the consistent messages we get ​from businesses is, for most sectors of the economy, a ⁠real lack of pricing power.”

Using their enhanced insight, central banks are, for now, confident that longer-term inflation expectations are holding firm around ⁠their targets.

But the longer the war drags on, the longer energy prices will stay high, and as consumers see everyday costs like fueling their cars rise, the ⁠more likely it is that inflation expectations ​will move upwards. When exactly this happens will not be clear, leaving policymakers to judge for themselves.

“Economics itself is not an exact science,” ECB policymaker Primoz Dolenc said.

“It’s of course based on analytics, but by definition, there is also a perception and judgment element.”

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Türkiye boosted its steel production to 3 million tons in February, marking a 3.4% surge in output on an annual basis, according to the Turkish Steel Producers’ Association (TCUD) on Wednesday.

The Turkish crude steel production volume for the first two months of the year reached 6.4 million tons, posting a 4.7% rise.

Final product consumption climbed 11.3% on an annual basis to 3.2 million tons in February and 4.1% to 6.7 million tons in the January-February period, the data showed.

Türkiye’s steel product exports surged 8.6% year-over-year in February to 1.1 million tons, while falling 9.2% in value to $714.8 million.

Exports in January-February fell 13.5% on an annual basis to 2 million tons, while declining 15.2% in value to $1.3 billion.

As for imports, Türkiye imported 1.5 million tons of steel products in February, up 9% year-over-year.

Imported steel products cost $1 billion, marking a rise of 7.2% in value.

In January-February, Turkish steel product imports declined 10.8% in volume to 2.7 million tons and 11.7% in value to $1.9 billion versus the same period last year.

The export-to-import ratio, standing at 72.5% in the first two months of last year, fell to 69.7% in January-February this year, the data showed.

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Leading German economic institutes have more than halved their forecasts for the country’s growth on Wednesday, warning that the energy shock caused by the Middle East war would hit Europe’s top economy hard.

A group of leading institutes slashed their joint growth forecast for 2026 to 0.6%, down from a September prediction of 1.3%.

Inflation is now forecast to rise to 2.8%, up from 2.0%, “weighing on household purchasing power.”

“The energy price shock triggered by the Iran war is hitting the recovery hard,” said economist Timo Wollmershaeuser of the Ifo institute, adding that increased government spending was nevertheless “preventing a stronger slide.”

Oil and natural gas prices have surged since the end of February, when the U.S. and Israel attacked Iran, killed its supreme leader and plunged the Middle East into war.

Iran has since closed the Strait of Hormuz to ships of countries it considers allied with the U.S. and Israel, effectively blocking a sea lane that normally transports about a fifth of the world’s oil and gas trade.

Higher inflation in Germany would hit consumer spending, the institutes said, weighing on an already weak economy that has barely grown since a burst of pent-up demand after the COVID-19 pandemic in 2022.

‘Zero growth’

Germany’s economy, struggling with fierce Chinese competition in sectors from cars to chemicals, was in the doldrums even before U.S. President Donald Trump last year imposed sweeping new tariffs before starting the Mideast war in late February.

Chancellor Friedrich Merz, who took office last May, vowed to borrow and spend hundreds of billions for a special infrastructure fund over the coming years in what was dubbed a spending “bazooka” aimed at getting Europe’s top economy back on its feet.

But the economists said that much of the money was simply paying for day-to-day spending.

“Government expenditure on consumption is rising much more sharply than investment,” economist Oliver Holtemoeller of the Halle Institute for Economic Research said. “That was not the idea behind changing the financing rules.”

The outlook for the longer term was also dire.

Citing low productivity, industrial decline and an ageing population, the institutes warned that Germany’s economy would soon be unable to grow sustainably.

“We have also reassessed the structural changes in the German economy and, in particular, revised our forecast for industrial growth downwards,” Wollmershaeuser said.

In an era when “demographic change is hitting with full force,” he said, “potential growth will come to a standstill by the end of the decade, and we will have to get used to average GDP growth rates of zero percent.”

In this phase of “multiple transformations,” the institutes recommend the German government “increase incentives for employment” and ease regulations to “improve conditions for investment and innovation.”

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Short-term economic effects of the Iran war are negative but manageable for Türkiye, with energy supply security not at stake and fiscal space being deployed as a shock absorber, according to Treasury and Finance Minister Mehmet Şimşek.

“Limited warflation, wider current account deficit, slower growth,” are among the effects, according to a presentation by Şimşek to investors in London.

Despite the risks, the minister said there has been no change in the government’s macroeconomic policy priorities and that disinflation remains authorities’ top goal.

Annual inflation in Türkiye was 31.5% in February after a gradual decline from 75% in 2024. But expectations have risen amid the conflict, largely due to soaring global energy prices.

The U.S.-Israeli war on Iran ‌has ⁠effectively shut the Strait of Hormuz, which ​normally carries around 20% of global crude, products ⁠and liquefied natural gas, stoking concerns about global energy supply.

Şimşek’s presentation said Türkiye’s energy supply security is not at stake.

The government’s policy framework remains focused on restoring price stability, maintaining fiscal discipline, achieving a sustainable current account balance and advancing structural reforms, the presentation said.

Higher energy costs pose risks

Şimşek said higher energy costs linked to the conflict could weigh on the economy.

If oil prices average around $85 per barrel in 2026, inflation could rise by roughly 3.6 to 4.4 percentage points, according to the presentation.

The same assumption could also reduce economic growth by around 0.6 to 1.5 percentage points.

Oil prices fell briefly below $100 per barrel on Wednesday after President Donald Trump said the U.S. could be done attacking Iran probably in two to three weeks, and that the U.S. “will not have anything to do with” what happens next in the Strait of Hormuz.

Şimşek said fiscal policy tools were being used to limit the pass-through of higher oil prices to domestic inflation.

To curb price hikes, authorities last month introduced a “sliding-scale” system, which adjusts the special consumption ​tax (ÖTV) on fuel products and prevents higher oil prices from being fully passed through to consumers.

Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan on Tuesday said their calculations showed the system reduces the impact of oil prices on inflation to one-third.

The central bank last month halted its easing cycle with the main rate at 37%, lifted its overnight rate by about 300 basis points to near 40% and undertook sales and swaps of foreign exchange and gold reserves to support the Turkish lira.

Karahan cautioned about the impact of the fallout from the Iran war on its fight against inflation, noting that in such situations it is a “natural choice” to turn to gold-based transactions to support liquidity.

Karahan said the monetary authority would maintain the needed tight policy to continue the disinflation process.

New trade corridors

In separate remarks on Tuesday, Şimşek said the Iran war is likely to reshape supply chains and create new trade corridors, presenting significant opportunities for Türkiye.

Şimşek said Türkiye is becoming an attractive destination once again for global talent and capital.

“In my view, Türkiye is once again becoming a center of attraction for global talent and capital,” he noted.

Şimşek said Türkiye remains not only a center of stability in a difficult global environment but also a strong manufacturing base and dynamic services center.

The conflict is likely to prompt companies to rethink and diversify supply chains, which Şimşek says could lead to the creation of new trade corridors.

Türkiye’s role in the Middle Corridor and its investments in regional connectivity could position the country to benefit from those changes, he added.

Şimşek also said the conflict would likely accelerate both the green transition and the digital transformation, creating additional opportunities across sectors.

“Our focus is on the twin transition, and we are making good progress in this area,” he said.

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Factories across the world ​faced soaring input costs and supply chain disruptions in March due to the Iran war as underlying tepid demand threatened to undermine the ⁠manufacturing sector’s fragile recovery, surveys showed on Wednesday.

The conflict ⁠has disrupted global logistics networks, causing delivery delays, pushing up input price inflation and distorting headline growth measures.

Higher oil and energy prices led manufacturers to react and raise selling ​prices.

Headline PMI numbers – usually a sign of increased activity – were ​falsely ⁠elevated by the supply shock lengthening delivery times, said Chris Williamson, chief business economist at S&P Global.

That was the case for the headline eurozone reading. In Asia, many economies saw it fall, a sign surging fuel costs and heightening uncertainty from the Iran war were taking a toll.

Wednesday’s S&P Global eurozone Manufacturing Purchasing Managers’ Index (PMI) rose to 51.6 in March from February’s 50.8, higher than a preliminary estimate of 51.4.

A reading above 50.0 would normally indicate growth in activity.

“While the uptick in the headline index has been, at face value, somewhat surprising given the renewed energy shock in global markets – particularly as the flash release pointed to weaker ⁠services – the aggregate masks meaningful cross-country divergence,” said Mariana Monteiro at JPMorgan.

Germany and Italy recorded their strongest readings in 46 and 37 months respectively, while Spain was the only country in contraction territory. Greece posted the highest reading, followed by Ireland, while France’s manufacturing sector stagnated.

In Britain, outside the European Union, cost pressures soared and delivery delays – due to ships avoiding the Strait of Hormuz – were the longest since mid-2022.

Asian strain

The findings highlight the challenge policymakers face in Asia, a region that buys about 80% of the oil that is shipped ⁠through the Strait of Hormuz, making many countries vulnerable to the hit from the energy shock caused by the war.

Already, drivers in Manila are facing diesel prices that have tripled, while a jet-fuel squeeze looms in Vietnam ​and South Korea’s major cosmetics firms are searching far and wide for plastic resin.

China’s manufacturing sector expanded in ​March for a fourth straight month – albeit more slowly and as inflationary pressures and supply chain strains intensified, a private survey showed.

The RatingDog China General Manufacturing PMI fell ⁠to 50.8 in ‌March from ‌52.1, missing analysts’ forecast of 51.6.

Manufacturing activity slowed in economies ranging ⁠from Indonesia, Vietnam, Taiwan and the Philippines, other PMIs showed, ‌highlighting the pain the Middle East conflict was already inflicting on businesses.

Japanese factories also took a hit from the ​souring business mood and cost pressures, which ⁠hit a 19-month high.

The final S&P Global Japan Manufacturing PMI ⁠fell to 51.6 in March from 53.0. Input prices rose at the fastest rate since August ⁠2024.

South Korea was an ​outlier with factory activity expanding at the strongest pace in more than four years, led by semiconductor demand and new product launches.

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Inflation in the eurozone saw the steepest monthly increase since late 2022 and soared past the European ​Central Bank’s (ECB) 2% target in March as surging energy costs amid the Iran war drove up headline prices, according to official figures released Tuesday.

The annual rate for the 21 countries using the euro currency jumped to 2.5% compared to 1.9% for February before the war started and blocked supplies of oil and gas from the Persian Gulf.

Energy prices increased 4.9% in March compared to a 3.1% decline in February, data from Eurostat, the EU’s statistics agency, showed.

Oil prices have nearly doubled as a result of the Iran war and the ECB is now debating whether to raise interest rates to prevent this surge from ​becoming entrenched in the price of other goods and services.

“The previously price-stable environment is saying goodbye” said Alexander ​Krueger, ⁠chief economist at Hauck Aufhaeuser Lampe. “What matters is that this inflationary dirt does not feed through into the core rate.”

A closely-watched figure on underlying inflation, which excludes volatile food and energy, meanwhile, fell to 2.3% from 2.4%, Eurostat data showed.

“Looking ahead, although this was the biggest monthly increase in headline inflation since late 2022 it tells us little about how far headline inflation will rise or how much it will feed through to core and services inflation,” said Andrew Kenningham, chief Europe economist at Capital Economics.

The war’s impact on prices has already hit home at the vast Trionfale indoor market in Rome just north of the Vatican, where vegetable stand owner Anna Caruso said the higher cost of fuel was being reflected in prices for zucchini, eggplant and fruit.

“If the price of fuel increases, those who transport will increase the general price,” she said. “With many items, they say, I can’t afford this… and shift toward the cheaper items.”

Some prices were higher due to some produce not being in season, said stand owner Paola Ianzi, “but the increase is also partially due to the war because diesel and fuel increased and those who transport fruit and vegetables need to compensate that.”

Food price inflation came in at a relatively moderate 2.4% while services, the single largest item in the consumer price basket and the key gauge for domestic inflation, rose 3.2%.

ECB head Christine Lagarde has said that businesses may be quicker to raise prices during this outbreak of inflation due to bitter memories of the last episode of higher prices in 2022, when inflation rose to double digits. Russia cut off most supplies of natural gas to Europe and oil prices rose, sending energy costs through the roof.

Iran has blocked most of the tanker traffic through the Strait of Hormuz, the waterway through which some 20% of the world’s oil and gas typically passes. That is raising the prospect of sharply tighter markets for fuel in the coming weeks and months.

Hike or look past?

Basic economic theory argues that central banks should look past one-off price shocks generated by supply disruptions, especially because monetary policy works with long lags.

But a quick rise in energy inflation can easily broaden out if companies start building this into selling prices and workers begin demanding higher wages for the loss of disposable income.

Germany’s leading economic institutes cut their growth forecasts for this year and next in Europe’s biggest economy, while sharply raising their inflation forecasts in response to the Iran war, underscoring the ⁠drag ⁠the conflict is expected to exert on the economy.

High energy prices should make other goods more expensive and push up core inflation, said Commerzbank’s chief economist Joerg Kraemer, forecasting headline inflation will rise above 3% by May unless the war ends quickly.

The public may also start doubting the ECB’s resolve if it remains idle, firming the case for rate hikes even in the event of large but not so persistent inflation episodes, Lagarde said last week. Financial markets now see three interest-rate hikes from the ECB this year, with the first in either April or June.

“The mounting inflation pressure suggests that the ECB will raise its key interest rates in April or, at the latest, in June,” Kraemer said.

While some policymakers such as the influential Bundesbank head Joachim Nagel said a rate hike as soon as April was an option, others, including ECB board ⁠member Isabel Schnabel, have warned against hasty action.

But policymakers agree that the ECB must act if energy starts generating second round price pressures, especially since domestic inflation had been above 2% for years.

“The risk of a policy mistake is now substantial on either side of the incoming stagflation shock,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

If governments cushion ​the blow from higher prices with tax cuts, subsidies or cash handouts, central banks may have to tighten policy more aggressively, but if they leave households to ​absorb the shock, economic growth could weaken sharply and eventually force rate cuts, Vistesen said.

Ghosts of 2022

Part of the issue ⁠is that the ECB ‌was late in ‌recognizing the inflation problem in 2021/22, arguing for months that the surge was transitory and would pass. It ⁠only raised rates when price growth hit 8%, forcing the central bank into its steepest tightening ‌cycle in its history.

“Consumers expect another rough ride, the past shock still fresh in memory,” said Bert Colijn, chief economist for the Netherlands at ING, adding that inflation expectations just increased to ​levels seen in the early 1990s and during ⁠the first half of 2022.

But the bloc is now in a very different position, so comparisons with 2022 are ⁠not entirely valid.

Rates are already higher, budget policy is tighter, the labor market has been weakening for months and there is no pent-up demand created ⁠by pandemic-era lockdowns.

The ECB will next ​meet on April 30.

“We find it hard to see the ECB moving at the next meeting at the end of April,” said Carsten Brzeski, global head of macro at ING. “Unless the ghosts of 2022 are really keeping policymakers awake at night.”