Inflation across the Eurozone picked up in March as energy prices surged amid the conflict in Iran, though the increase came in slightly below economists’ expectations.
Consumer prices across the 21 countries using the euro rose 2.5% year-on-year in March, up from 1.9% in February, a month that largely preceded the escalation of fighting in the Middle East. Economists had forecast inflation at 2.6%.
Even so, the figure remained well above the European Central Bank’s 2% inflation target. ECB officials have recently indicated that interest rate increases could be considered as policymakers respond to the inflationary impact of the joint U.S.-Israeli military action against Iran that began in late February.
The sharp rise in oil and gas prices has been one of the defining features of the conflict. Eurozone energy costs climbed 4.9% in March, reflecting disruptions linked to the war. The effective shutdown of the Strait of Hormuz — a key shipping route off Iran’s southern coast through which roughly one-fifth of the world’s oil supply passes — has restricted global energy flows.
Europe has also grown more dependent on natural gas imports from the Persian Gulf since Russia’s invasion of Ukraine in 2022. Production facilities in the region have recently been targeted by Iranian air strikes, adding further uncertainty to energy markets.
While the ECB would typically look through temporary price shocks, ECB President Christine Lagarde has indicated that policymakers are prepared to react even if inflationary pressures prove only moderately persistent. Officials are particularly concerned that the spike in energy prices could feed into broader inflation across the economy.
Prices for services — a key component of Eurostat’s inflation data and an important driver of domestic price pressures — eased slightly, rising 3.2% in March compared with 3.4% the previous month.
The ECB, which is scheduled to meet again on April 30, is now widely expected to raise interest rates three times this year, with the first increase potentially coming as soon as next month or in June.
“[T]he longer the shock lasts, the higher the risk of second-round effects causing broader elevated inflation,” said Bert Colijn, Chief Economist, Netherlands, at ING in a note.
“[L]ooking ahead, you cannot see the energy price increase in isolation. It’s all about the Middle East, which dominates the inflation outlook, and not just when it comes to energy prices, but also expect upside risk to food and goods prices given fertiliser shortages and broader supply chain problems stemming from the war.”
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