Lagarde says energy shock and AI boom are muddling the ECB's read on inflation

European Central Bank President Christine Lagarde said Thursday that reading the economy has gotten genuinely hard, with energy prices spiking on one side and artificial intelligence on the other. Speaking at an event hosted by the Osservatorio organization in Milan, Italy, she admitted it is difficult to "disentangle" supply-driven shocks from demand-driven ones. The ECB, she said, has to apply the measures needed to stop inflation from "running away."

That caution isn't new. Earlier this month, Lagarde noted inflation is still sitting above the central bank's 2% target, while the Governing Council unanimously agreed to hold off on any policy move until more data lands.

The backdrop explains the nerves. Eurostat's preliminary report put Eurozone annual inflation on track for 4% in October, up from 3.8% in September, with energy prices forecast to leap 20.8% year-on-year. Services, food, alcohol, tobacco and non-energy industrial goods were all flagged as contributors too.

Lagarde isn't the only ECB voice sounding the alarm. Bundesbank President Joachim Nagel said a December rate hike is "very likely" necessary, and Bulgarian National Bank Governor Dimitar Radev called current rates "inadequate," warning the October pause doesn't end the tightening cycle and that the ECB shouldn't wait for second-round effects to kick in.

Over in London, Bank of England Governor Andrew Bailey said Thursday the central bank would have raised rates even if policymakers had known about the latest Middle East developments, pointing to inflationary pressures already building. He cited the drop in oil prices over the past 48 hours as proof of market volatility and rising hopes for a resolution to the conflict in Iran, but declined to comment on the day's rebound and wouldn't commit to a monetary path without a clear resolution.

Traders weren't waiting around. Europe's FTSE 100 dropped 2.57% and Germany's DAX slipped 0.77%, while on Wall Street the S&P 500 fell 2.84% and the tech-heavy Nasdaq tumbled 4.8%. Gold climbed 0.83% as investors reached for cover.