Eurozone inflation unexpectedly accelerated in February, with core price pressures spreading beyond expectations, while the sudden surge in energy prices triggered by the Middle East conflict is bringing new uncertainties to an inflation path that was originally stabilizing.
According to data released by Eurostat on Tuesday, consumer prices in the Eurozone rose 1.9% year-on-year in February, up from 1.7% in January and higher than analysts' expectations (1.7%). Core inflation, excluding food and energy, also unexpectedly rebounded to 2.4%, with service inflation rising to 3.4%.
Meanwhile, military actions surrounding Iran are stirring the oil and gas markets and raising the risk of imported inflation. European natural gas prices have surged over 70% since last Friday's close, and the global benchmark Brent crude oil has surpassed $80 per barrel.
On the policy front, European Central Bank Chief Economist Philip Lane stated in an interview with the Financial Times published on Tuesday that the central bank will &#34;closely monitor developments.&#34; Betting on interest rate hikes in the derivatives market has also increased, with Bloomberg data showing that traders currently price in about a 50% probability of a 25 basis point rate hike by the European Central Bank this year.
<h2>Inflation Data: Core and Service Components Strengthen Again</h2>
The rebound in February's inflation exceeded market expectations. Rising food and service prices offset the previous suppression caused by low energy prices, bringing overall inflation back from 1.7% to 1.9%.
The &#34;endogenous inflation&#34; indicator, which is of greater concern to the European Central Bank, has also risen. Core inflation increased from 2.2% to 2.4%, and service inflation rose to 3.4%, indicating that price pressures are not solely driven by energy.
The European Central Bank will update its quarterly forecast at its next meeting in less than three weeks, having previously projected first-quarter inflation at 1.9% in December last year.
<h2>Energy Shock: Oil and Gas Price Increases May Quickly Pass Through to Consumer Prices</h2>
The market is currently more focused on how long the impact of the Iran-related conflict on energy supply and transportation will last, and how quickly rising oil and gas prices will be passed on to consumers.
Reuters points out that fuel retailers often pass on rising costs to drivers within a few days, so if the conflict continues to restrict production or transportation, the price impact could be quite rapid.
Institutions have begun to quantify the potential impact. Reuters cited JPMorgan's view that if the price of Brent crude oil rises by 10% in euros, it would push overall inflation in the Eurozone up by about 0.11 percentage points within three months.
Based on the energy price fluctuations over the past week, if prices stabilize at current levels, inflation could be raised by about 0.2 percentage points.
<h2>Policy Implications: European Central Bank Emphasizes &#34;Sustainability&#34; and Warns of Secondary Effects</h2>
European Central Bank officials are currently &#34;satisfied&#34; with maintaining borrowing costs at 2% and believe inflation will return to target, with the economy able to sustain moderate expansion. However, Bloomberg points out that the Middle East conflict will amplify uncertainty.
Philip Lane mentioned in the Financial Times interview that the central bank had previously modeled a scenario in which the Middle East war leads to energy supply disruptions, which could result in &#34;a sharp surge in energy-driven inflation and a dramatic decline in output.&#34;
From the perspective of policy response conditions, Reuters cited Societe Generale stating that, given inflation is still expected to remain below 2% in 2026 to 2027, there is no urgent need to adjust policies in the short term. Only if oil prices experience a &#34;sustained and significantly larger&#34; increase, along with a lasting secondary transmission effect, could this constitute a reason for tightening.
Reuters also emphasized that the European Central Bank typically downplays temporary fluctuations in energy prices, and the transmission of policy has a lag, limiting the suppression of short-term price pressures.
<h2>Market Pricing: Rate Hike Bets Rise, German Short-Term Bond Yields Increase</h2>
The sharp rise in energy prices has prompted the interest rate market to reprice. According to Bloomberg data, traders currently believe the probability of the European Central Bank raising rates by 25 basis points this year has risen to 50%.
This shift in expectations has intensified the sell-off of short-term government bonds. The yield on the two-year German government bonds, which is more sensitive to interest rate expectations, has increased by 0.2 percentage points this week to 2.2%.
The key variables that will determine the path of European inflation and interest rates going forward will be the duration of the conflict, whether oil and gas prices remain high, and whether there are more lasting secondary effects in areas such as services and wages.

Eurozone inflation in February rose by 1.9% year-on-year, exceeding expectations; core inflation increased by 2.4%, and service inflation rose by 3.4%, above the European Central Bank's 2% policy target. Coupled with the surge in European natural gas and oil prices due to the Middle East conflict, the "endogenous + imported" dual inflation pressure has sharply increased. The policy path of the European Central Bank faces new uncertainties, with the market believing that the probability of a 25 basis point rate hike by the ECB this year has risen to 50%

- In February, Eurozone inflation unexpectedly accelerated to 1.9%, driven by rising consumer prices and core inflation reaching 2.4%, amidst energy price surges linked to Middle Eastern conflicts.  
- These developments led to increased speculation of a potential interest rate hike by the European Central Bank (ECB), with a 50% probability of a 25 basis points increase.  
- The ECB emphasizes the need to monitor inflation sustainability and potential second-round effects, while current energy price volatility may limit immediate policy adjustments.

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Eurozone February CPI rose 1.9% year-on-year, exceeding expectations! Iranian risks drive up oil and gas prices, and market interest rate hike expectations rise