Financial markets have significantly repriced inflation expectations following the escalation in the Middle East conflict, with Brent crude oil up nearly 50% since the week before Operation Epic Fury. Gasoline prices, a key indicator for US consumers, are also surging, with station prices per gallon expected to exceed $4 soon. However, the most severe impact is on European inflation, where natural gas prices have soared to €56 per megawatt-hour from €32, driving a 0.4 percentage point increase in year-ahead inflation swap expectations.

This repricing has led to a shift in central bank policy expectations, with potential rate cuts in the US now less likely, while hikes are anticipated across Europe. The bond yields have risen sharply in response, pushing prices lower as investors demand higher compensation for inflation risk. The market remains uncertain about when the conflict will end and the price shock subside.