Euro zone inflation has soared past the European Central Bank’s two per cent target due to surging oil and gas prices, heightening a policy dilemma as expensive energy drags growth and risks generating a self-reinforcing inflation spiral.
Oil prices have nearly doubled as a result of the Iran war and the ECB is debating whether to raise interest rates to prevent this surge becoming entrenched in the price of other goods and services.
Overall inflation in the 21 countries sharing the euro currency jumped to 2.5 per cent in March from 1.9 per cent a month earlier, below expectations for 2.6 per cent in a Reuters poll of economists, as energy costs rose 4.9 per cent.
“The previously price-stable environment is saying goodbye” said Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe.
“What matters is that this inflationary dirt does not feed through into the core rate.”
A closely watched figure on underlying inflation, which excludes volatile food and energy, meanwhile, fell to 2.3 per cent from 2.4 per cent, data from Eurostat, the EU’s statistics agency showed on Tuesday.
Basic economic theory argues that central banks should look past one-off price shocks generated by supply disruptions, especially because monetary policy works with long lags.
But a quick rise in energy inflation can easily broaden out if companies start building this into selling prices and workers begin demanding higher wages for the loss of disposable income.
High energy prices should increasingly make other goods more expensive and push up core inflation, said Commerzbank’s chief economist Joerg Kraemer, forecasting headline inflation will rise above three per cent by May unless the war ends quickly.
The public might also start doubting the ECB’s resolve if it remained idle, firming the case for rate hikes even in the event of large but not so persistent inflation episodes, ECB President Christine Lagarde said last week.
Financial markets now see three interest rate hikes from the ECB in 2026, with the first in either April or June.
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