Global oil and gas prices have nearly doubled amid escalating conflict with Iran, sending shockwaves through energy markets. The impact is already visible in the Eurozone: consumer prices surged in March, pushing inflation above the European Central Bank’s (ECB) two-per-cent target.
The Eurozone economy is facing a fresh wave of inflationary pressure. According to a flash estimate from Eurostat, year-on-year consumer price growth accelerated to 2.5 per cent in March, up from 1.9 per cent in February.
This occurred despite a slight easing of core inflation, which excludes volatile food and energy prices. It fell marginally from 2.4 to 2.3 per cent. Energy costs alone rose by 4.9 per cent in March. Higher fuel prices already making their way through the economy, pushing up the cost of transport, manufacturing, and services.
Three per cent by May?
Analysts warn that if tensions in the Middle East persist, inflation could exceed three per cent by May. The ECB now faces a difficult choice: how to rein in the inflationary spiral without jeopardising economic growth across the eurozone.
“The mounting inflation pressure suggests that the ECB will raise its key interest rates in April, or at the latest in June,” says Jörg Krämer, chief economist at Commerzbank. While higher rates may ease price pressures, they are also likely to slow investment and consumption.
Risk of stagflation
Rising energy costs are already driving up expenses across multiple sectors. Companies are passing these higher costs on to goods and services, creating the risk of so-called second-round effects, where inflation spreads into wages and other expenses. If this process takes hold, the eurozone could face stagflation – a combination of sluggish growth and elevated inflation.
Since mid-2024, the ECB has gradually reduced interest rates to support economic growth in the eurozone. The deposit rate has halved since then and has remained at two per cent for almost a year. This month, the ECB kept rates unchanged, while issuing a warning about further price rises.
