The impact of the Middle East war is becoming evident: Eurozone March inflation is rising rapidly, and expectations for interest rate hikes are increasingly being confirmed.

Caixin Global, March 31 (Editor: Shi Zhengcheng) Data released Tuesday by the European Union’s statistics office, Eurostat, show that as fighting in the Middle East has sharply driven up energy prices, in March the euro area’s inflation rate jumped from last month’s 1.9% to 2.5%, first time since last November to move above the European Central Bank’s 2% inflation target.

（Source: Eurostat）

It is also the highest level for euro area inflation since January 2025, as well as the steepest increase since 2022.

After fighting in Iran broke out again on February 28, Brent crude oil prices have already risen by 50%, breaking through the $100 per barrel mark; therefore, the euro area’s inflation uptick is almost entirely coming from oil prices. The data show that energy prices in the euro area rose 4.9% year over year in March, the first year-over-year increase since February 2025; the February figure was -3.1%.

（Source: Eurostat）

Looking at major regional economies, Germany (2.0%→2.8%) and Spain (2.5%-3.3%) saw the largest increases, and France (1.1%→1.9%) is also rising rapidly, though it has not reached 2%. Italy, however, was surprisingly maintained at 1.5%.

However, the “second-round inflation effect” caused by energy price increases—namely, the transmission of higher energy prices into the prices of other goods and services—has not yet appeared in this inflation report. Because service-sector inflation has eased, core inflation in the euro area even fell from 2.4% in February to 2.3%.

Of course, if fighting in the Middle East continues to keep energy prices high, it is only a matter of time before inflation transmission occurs. Data released by the EU on Monday show that euro area consumers’ inflation expectations for the next 12 months rose markedly, and businesses also expect sales prices to jump sharply.

Therefore, policymakers at the European Central Bank will weigh how to respond to the next round of inflation rising.

In the ECB’s official economic forecast in mid-March, the central bank set this year’s baseline inflation outlook at 2.6%. In more extreme scenarios, euro area inflation could reach a peak of 6.3% at the beginning of 2027 and an annual average of 4.8% in 2027.

In response, Madis Müller, governor of the Bank of Estonia, said Tuesday: “Today we can say that the baseline scenario locked in on March 11 is very likely to be viewed as an optimistic scenario. If energy prices stay at high levels for a long time, of course we cannot rule out the possibility that interest rates will change as early as April.”

In a speech last week, ECB President Lagarde said that if inflation deviates significantly from the target level, the policy response must have sufficient strength or persistence.

According to LSEG data, traders expect the ECB to raise rates three times this year from the current 2% level, and most expect the next rate hike to occur at the next meeting (April 30).

Diego·Escaró, head of European economic intelligence at S&P Global Market Intelligence, also pointed out: “Although communication so far has been relatively cautious, there are signs that the rise in energy prices is seeping into inflation expectations, which is very likely to prompt the European Central Bank to take action as early as April by raising policy rates.”

The euro area situation could also appear in more regions. Joshua Mahony, chief market analyst at Scope Markets, said Tuesday: “The rapid rise in euro area inflation indicates that second-round price pressures are forming, and only just beginning to show up. It is worth noting that energy has shifted from being the key force that previously pushed inflation down to becoming the main driver pushing inflation above the target level.”

He added: “For central bank officials in each country, the next task is to judge whether this change is merely a stage-specific factor that can be temporarily ignored, or whether it signals that the drivers of inflation will continue to push higher in the future.”

（Caixin Global, Shi Zhengcheng）