The six-month-long energy crisis originating in the Middle East is compelling central banks worldwide to abandon their "transitory inflation" stance. While oil price increases were initially viewed as a one-off supply shock, the prolonged disruption to energy supplies, compounded by tariffs, supply chain turmoil, and geopolitical tensions, has sparked concerns about renewed inflation expectations. The policy space for central banks to "look through" energy shocks is narrowing rapidly.

With the Federal Reserve set to announce its rate decision on Wednesday, market pricing indicates an 89% probability of a hike, with both Goldman Sachs and HSBC projecting a 25-basis-point increase. The Bank of Japan is expected to follow suit on Friday, while the Reserve Bank of Australia, the Bank of Canada, and the Bank of England all face potential moves within the next eight weeks. Last week's rate increase by the European Central Bank has emerged as a pivotal signal of this global shift toward monetary tightening.

Oil price momentum is reinforcing these expectations. International crude surged over 3% on Monday, with WTI futures climbing back to roughly $103 per barrel. US gasoline prices hit their highest level since May, and diesel prices broke through $6 per gallon for the first time. Spot gold slipped 1.3% to $4,292.13 per ounce, pressured by a stronger dollar and intensifying rate-hike expectations that are weighing on precious metals.

Why the "Transitory Inflation" Logic Has Failed

Central banks have historically been able to look past energy shocks because the public believed price increases were temporary, keeping inflation expectations anchored. During the 1990 Gulf War and the 2011 Arab Spring, the Fed refrained from immediate tightening despite oil price spikes, and those calls proved largely correct.

However, the current shock differs in both duration and complexity. Supply chain disruptions, the Russia-Ukraine conflict, shifting tariff policies, and US-Iran tensions have all compounded costs. Meanwhile, the six-month closure of the Strait of Hormuz has transformed energy supply risks from a short-term issue into a permanent structural variable.

The latest oil price surge amplifies these risks. UBS analyst Giovanni Staunovo notes that following the CPI release, markets have already priced in Fed rate hikes; any further oil price gains will only intensify inflationary concerns.

Rate Hikes on the Horizon, Yet Policy Rationales Diverge

Europe and the UK face the most direct energy impact, given their heavy reliance on fuel imports. Higher oil and gas prices transmit quickly into broader inflation through household energy bills and industrial costs. Japan, also an energy importer, views its potential rate increase primarily as part of monetary policy normalization, with rising energy costs adding further justification for tightening.

The United States presents a different picture. As a major energy producer, it faces a relatively limited direct impact from higher import costs, and economic growth remains resilient, giving the Fed more room to balance inflation against growth. Should energy prices stay elevated, the Fed's primary concern will be whether inflation expectations re-anchor upward, rather than the direct economic toll of the energy shock itself.

Consequently, this round of global central bank policy is likely to feature "convergent direction, divergent motivations": Europe and the UK tackle energy-driven inflation, Japan continues its normalization path, and the US guards against energy prices reigniting inflation expectations. If Middle East diplomatic efforts stall further, the window for central banks to wait for inflation to subside on its own will shrink even more.