Central Banks Are Confronting an Energy Shock Without Demand Strength

State Street’s Weekly Economic Perspectives argues that the Iran-driven energy shock is increasingly colliding with weakening global demand, complicating the path for central banks across Europe, the UK, and Japan. 

• Eurozone services PMI fell to 46.4, its weakest level since early 2021, while firms struggled to pass higher input costs onto consumers — a sign of emerging demand destruction rather than overheating inflation.
• UK inflation and services activity both slowed sharply, with unemployment rising to 5.0%, strengthening the case for the Bank of England to delay further tightening.
• Japan remains the outlier: stronger GDP growth and resilient domestic demand keep the door open for a significant Bank of Japan hike despite temporary subsidy-driven inflation weakness.

The broader tension running through the report is increasingly clear: policymakers are facing inflation driven by energy and geopolitics precisely as underlying economic momentum begins to weaken.