The world energy market is experiencing declining supplies and a prospect of an unprecedented magnitude and duration of severe energy shortages.

The European Union (E.U.) was the first region to face those problems in 2014, after the violent change of Ukrainian government and the ensuing unrest in Donbas. That situation markedly deteriorated with the beginning of the war with Russia in February 2022, and the blowup in late September of North Stream pipelines that were supplying natural gas to Germany and the rest of Western Europe.

The E.U. and the U.S. followed up with unilateral sanctions, cutting off all trade transactions with Russia. Those E.U. sanctions are still in force; they are periodically reinforced to reduce Russian oil revenues and terminate the union’s dependence on Russian energy supplies.

A much broader disruption of world energy markets was caused by the U.S. and Israel war with Iran in June 2025. A new wave of U.S. and Israel attacks on Iran was launched in February 2026, culminating with the closure of the Strait of Hormuz affecting one-fifth of global energy flows. A ceasefire of sorts was agreed in April 2026 with frequent exchanges of fire salvos hitting Iran, Israel and U.S. assets in the Persian Gulf.

Rising inflation in recession bound economies

Predictably, rising energy and food costs have led to accelerating inflation in the E.U. The flash estimate in the euro area for May shows an inflation rate of 3.2 percent compared with 1.7 percent at the beginning of this year. Energy costs in May rose 10.9 percent from the year earlier – more than doubling since March – and food prices were increasing at a rate of 4.5 percent.

That accelerating inflation is a remarkable development in a stagnating euro area economy -- with a quarterly growth rate of 0.1 percent in the first three months of this year.

The U.S. -- the world’s largest energy producer -- also experienced accelerating consumer price inflation. The CPI in April rose 3.8 percent from the year earlier, after a 3.3 percent increase in the previous month, while energy prices soared 18 percent, with gasoline prices shooting up 28.4 percent.

The question now is: What should the monetary policy do with an inflation rapidly rising way above the official target of 2 percent?

The answer is simple: Nothing -- if those are temporary and reversible price upticks, and if inflation expectations are well anchored.

But is that the case? The answer is -- no. Energy prices are driven by wars where endgames are neither clear nor imminent.

Ukraine war is not a question of territories. Russia, by far the largest country in the world, wants to secure its western borders facing a hostile and largest military alliance in history. Moscow wants a neutral, demilitarized and “denazified” Ukraine which used to be part of the historic Russia.

That is utterly unacceptable to an Ukraine turned fiercely russophobe and to its de facto NATO allies.

Fighting to the last Ukrainian?

France, Germany and the U.K. want to continue to fight -- with the U.S. fully engaged -- while Washington looks like it would be happy to wash its hands off the war it actively supported with arms, huge amounts of money, intelligence and military personnel.

Ukraine, therefore, has become a powder keg in the middle of two largest nuclear-armed adversaries.

Iran is a similar conundrum. Israel considers Iran an existential threat: Literally, if I don’t kill them, they will kill me. Israel has nuclear arms, but Iran cannot have them under any circumstances. The U.S. is there to disarm Iran, and to make sure that Iran cannot have access to nuclear weapons.

Iran claims that it has the right to develop peaceful nuclear energy under international supervision. Israel is adamantly opposed to that. The U.S. agrees.

Iran also considers that the Strait of Hormuz is part of the territory it shares with Oman and United Arab Emirates. That is the geography, but it is still considered a problematic claim.

Iran wants the blockade of its ports lifted, a return of its U.S. seized assets and guarantees of no further attacks. None of that is acceptable to the U.S. and Israel -- unless there are significant changes in Iran’s system of governance.

It, therefore, appears that people forecasting monetary policy changes on assumptions of transitory and reversible energy prices know something nobody else does.

The truth is that -- even if Ukraine and Iran problems were to be solved tomorrow -- energy price inflation would linger on for quite some time because the energy infrastructure has been damaged, and it would take time to repair and restore those facilities.

Meanwhile, the world is facing not just energy shortages but also dwindling supplies of some key energy derivatives like fertilizers. That will lead to rising food prices and possibly frightening humanitarian problems in poverty stricken developing nations.

Advanced economies should restore peace and properly coordinated monetary policies to support economic activity and open trade flows -- even if that means overshooting their inflation targets.