Eurozone inflation jumped to 2.5% in March from 1.9% the previous month, driven by a 4.9% jump in energy costs due to the war in the Middle East. While this figure exceeded the European Central Bank’s (ECB) 2% target, it was still below analysts’ expectations of 2.6%.
Eurostat data showed a contradictory trend as core inflation, which excludes energy and food components, actually fell to 2.3%. The decline makes it difficult for the ECB to determine whether the current price increase is temporary or will spread to other services and goods sectors.
Geopolitical tensions have caused oil prices to almost double, prompting the German economic institute to lower its growth forecast for Europe’s largest economy. Economists have warned that headline inflation could rise above 3% by May if the conflict in the Middle East does not end soon.
Financial markets are now expecting three interest rate hikes by the ECB in 2026 to curb rising inflation expectations. While some officials have suggested a hike as early as April, there are concerns that hasty action could worsen an already weak economy.
The ECB is scheduled to meet on April 30 amid a significant risk of stagflation. Policymakers will have to balance the need to stabilize prices with the risk of triggering a deeper recession if interest rates are raised too aggressively when domestic demand is weakening.
