Tensions in the Middle East have driven up energy costs, leading to the largest surge in Eurozone inflation since 2022 in March, as markets bet on the European Central Bank starting rate hikes as early as next month.
Data released by Eurostat on Tuesday showed that consumer prices in the Eurozone rose 2.5% year-on-year in March, a sharp jump from 1.9% in February, reaching the highest level since January 2025 and marking the largest monthly increase since 2022. The impact of high energy prices is accelerating in Europe due to the ongoing Middle East conflict, leading several governments and central banks to downwardly revise their economic growth forecasts.
Following the release of the inflation data, market expectations for the European Central Bank to raise interest rates two to three times this year remain largely unchanged, with the first action potentially taking place as early as April. Madis Muller, Governor of the Bank of Estonia, stated on Tuesday that given the current situation, the baseline scenario set when locking in assumptions in March &#34;could probably be considered an optimistic scenario,&#34; and explicitly noted that &#34;if energy prices remain high in the long term, a rate adjustment in April is by no means impossible.&#34;
Although the March inflation data was slightly below the Bloomberg survey median of 2.6%, and core inflation unexpectedly slowed to 2.3%, several ECB officials warned that the risk of further inflation acceleration cannot be ignored, and the wage-price spiral must be closely guarded against.
<h2>Energy Shocks Dominate, Core Inflation Unexpectedly Cools</h2>
The main driver of this round of price increases comes from energy costs, closely linked to the sustained rise in international oil and gas prices following the outbreak of the Middle East conflict.
Core inflation (excluding volatile items such as food and energy) unexpectedly fell back to 2.3%, lower than the previous reading; services prices also slowed. This divergence adds a more complex backdrop to policy discussions within the ECB.
Bloomberg Economics analysts Simona Delle Chiaie and David Powell noted that the data suggests the impact of the recent commodity price surge on March inflation &#34;may be slightly overestimated&#34; in the ECB's baseline scenario, which could provide grounds for dovish members of the Governing Council to keep rates unchanged in April.
<h2>Inflation Divergence Across Countries, Germany and Spain Lead Increases</h2>
Inflation trends within the Eurozone showed significant divergence in March. Germany and Spain, which were the first to release data, saw clear accelerations in inflation, with year-on-year increases reaching 2.8% and 3.3%, respectively; while inflation in France edged up, it remained below 2%; Italy unexpectedly held steady at 1.5%, showing no signs of heating up.
Notably, German inflation rose to its highest level in over a year, closely related to war-driven energy prices. The harmonized index of consumer prices (HICP) rose year-on-year in most major economies, reflecting a generalized upward trend. Analysts expect overall Eurozone inflation to rise further in the future, continuing to pressure the ECB.
<h2>ECB Focuses on Second-Round Effects, Officials Signal Hawkish Stance</h2>
Faced with the reality of being unable to directly intervene in energy market volatility, the ECB is focusing its policy on preventing second-round effects—the transmission of rising energy prices to wages and the prices of other goods. The linked rise in fertilizer and food prices has also raised concerns at the ECB, as these changes directly impact household inflation expectations.
A survey released Monday showed that consumer inflation expectations surged in March, and businesses also expect to significantly raise product prices. In markets, long-term inflation swaps spiked early in the conflict before retreating as rate hike expectations were priced in.
Several ECB officials have issued clearer signals. Peter Kazimir, Governor of the National Bank of Slovakia, stated that the longer and more disruptive the Middle East conflict is, the greater the inflation risk, necessitating an earlier and more decisive response. Boris Vujcic, Governor of the Croatian National Bank, said the acceleration in inflation was &#34;expected.&#34; Fabio Panetta, Governor of the Bank of Italy, emphasized the need to closely monitor inflation expectations, prevent a wage-price spiral, and ensure monetary policy actions remain appropriate.
The sustained high oil and gas prices have put pressure on the ECB's baseline forecast of an average inflation rate of 2.6% this year. According to the ECB's extreme scenario calculations, price growth could peak at 6.3% in 2027.

L5EW

SMEA

IEUA

Driven by the Middle East conflict pushing up energy costs, Eurozone headline inflation rose 2.5% year-on-year in March, marking the largest monthly increase since 2022, while core inflation unexpectedly slowed to 2.3%. Markets are betting on the ECB to initiate rate hikes as early as April. Officials warn that the risk of accelerating inflation cannot be ignored, with policy focus centered on preventing the second-round transmission of energy prices to wages and goods prices

- Eurozone inflation in March rose by 2.5%, the largest increase since 2022, driven by high energy costs due to ongoing Middle East conflicts.  
- Market expectations suggest that the European Central Bank will increase interest rates two to three times within the year, with action possibly starting as early as April.  
- Despite core inflation unexpectedly easing to 2.3%, officials warn of risks from a wage-price spiral, emphasizing the need to monitor inflation expectations closely.

Wallstreetcn

Eurozone March Inflation Surges to 2.5%, Largest Increase Since 2022, Rate Hike Expectations Intensify Significantly