American and European monetary authorities are facing sharply rising inflation pressures, widening budget deficits, increasing public debt, slowing economic growth, soaring energy prices, uncontrollable fighting in the Middle East, and an outburst of European military hostilities.

The question is not whether the U.S. Federal Reserve (the Fed) and the European Central Bank (ECB) should be raising interest rates when inflation is running way ahead of their policy targets. No, financial markets have answered that question by pushing up interest rates they want to charge for lending money to profligate governments and hard put private borrowers.

Interest rates we see now are a resounding vote of no confidence in Fed’s and ECB’s monetary policies. Financial markets firmly believe in monetarism’s doctrinal view that inflation is always, and everywhere, a monetary phenomenon.

Here is a short review of latest inflation developments in the U.S. and in the euro area.

The U.S. consumer prices in April rose 3.8 percent from the year earlier and 0.6 percent from March. That is a significant acceleration from 2.4 percent in January. If those numbers were showed the way they now report the GDP, the monthly CPI increase of 0.6 percent in April would be an impressive annualized 7.2 percent. In fact, an annualized monthly 0.2 percent CPI increase last January exactly matched the year-over-year 2.4 percent.

April CPI’s energy prices soared 17.9 percent, and their 3.8 percent monthly gain is an alarmingly annualized 45.6 percent.

Rising inflation in weakening economies

The U.S. producer prices in April -- showing price pressures that will soon emerge at the consumer level – also accelerated to 6 percent, doubling from 3.1 percent in January.

A similar situation was observed with consumer prices in the euro area.

The monetary union reported a 3 percent year-over-year consumer price inflation in April, with a 1 percent increase from the preceding month – an annualized inflation shock of 12 percent. Energy prices rose 10.8 percent in the year to April and 3 percent from March. Strong monthly price increases of 1.1 percent were also recorded in unprocessed food and in services – two sectors with a strong impact on euro area’s inflation.

In the four largest euro area economies inflation was in the range of 2.5 percent in France and 3.5 percent in Spain, with strongest monthly increases of 1.2 percent in France and 1.6 percent in Italy.

And that accelerating inflation is happening during periods of weakening economic activity.

That is particularly the case in the euro area where the GDP growth in the first quarter of this year slowed to an annual rate of 0.8 percent from an average growth of 1.4 percent in the preceding three quarters. Germany, accounting for nearly one-third of the area economy, recorded no quarterly growth in the year to the first quarter of 2026.

The most recent evidence shows that the U.S. monetary authorities don’t expect any near-term relief from energy driven inflation pressures. Their European colleagues are more optimistic, with anticipations that energy prices will ease in a few months, and that no credit tightening will be necessary to restore price stability.

Wars, energy problems and changing world order

It, therefore, appears that European central bankers know something about the Middle East and Russian energy supplies that financial markets and their American colleagues are yet to discover.

The truth is that, as President Trump says, the U.S. is “fully LOCKED AND LOADED” (sic) to resume strikes if Iran does not hand over 400 kg of its “nuclear dust” (60 percent enriched uranium) and gets out of the way to open the Hormuz Strait which handles an estimated 20 percent of global energy supplies.

And that still leaves out Israel’s intention to eliminate what it considers an existential threat from Iran and its allies in Lebanon (Hezbollah) and Palestine (Hamas).

The Europeans, however, could still be right if they could bury their secular hostilities with Russia – the world’s second largest oil producer (with Saudi Arabia), with an output of 11 million barrels per day, and the world’s second largest producer of natural gas.

According to its official statements, the E.U. wants to “end its dependency on Russian energy … while ensuring stable energy supplies and prices across the Union.” And they propose to do that “by the end of 2027.”

Tall order indeed. Meanwhile, energy supplies are declining because of Middle East’s permanent state of war and increasing military operations in Ukraine and along Russia’s western borders.

Inflation, therefore, will continue to accelerate, dragging down real incomes, household consumption, residential and business investments, because the euro area’s high public debts and budget deficits will not allow any meaningful fiscal stimulus.

Germany’s worsening recession will probably destroy an already shaky ruling coalition. Italy could soon struggle with the same scenario, and center-right political forces in France will continue to gain ground in the runup to presidential elections in April 2027. All that will lead to profound changes in E.U.’s executive institutions.

The U.S. economy will also continue to weaken, and next November’s Congressional elections will change the legislative-executive balance of power.

Apart from that, Washington will have to manage increasing challenges to its world order.