Eurozone inflation hits 2.5% as Iran war drives energy prices higher

Consumer prices in the Eurozone rose at the fastest pace in over a year in March, as a sharp increase in energy costs linked to the Iran conflict pushed inflation above the European Central Bank’s target.

Inflation in the Eurozone accelerated to 2.5% in March from 1.9% in February, according to preliminary estimates from Eurostat.

The reading came in slightly below market expectations of 2.6% to 2.7%, but marked a clear rebound driven by rising oil and gas prices.

Energy prices rose 4.9% year-on-year, reversing a 3.1% decline in February and registering their first annual increase since early 2025.

The jump reflects the surge in global crude prices, with Brent climbing more than 50% to above $100 a barrel since the escalation of the conflict involving Iran in late February.

The increase pushed overall inflation above the ECB’s 2% target for the first time since November, complicating the policy outlook for the central bank.

Underlying inflation remains contained

Despite the headline surge, underlying price pressures showed signs of easing.

Inflation excluding energy edged down to 2.3% in March from 2.4% in the previous month, suggesting that the current spike is largely energy-driven.

Among the main components, services inflation moderated slightly to 3.2% from 3.4%, while food, alcohol and tobacco slowed to 2.4%.

Non-energy industrial goods rose at a subdued 0.5%, indicating limited pricing pressure in goods sectors.

Economists said the key question now is whether higher energy costs will spill over into broader inflation dynamics.

Andrew Kenningham, chief Europe economist at Capital Economics, said the latest figures offered limited clarity on the persistence of inflation.

“This will depend on the duration and severity of the Iran conflict,” he said, pointing to the uncertainty surrounding energy markets.

ECB faces policy dilemma

Policymakers at the European Central Bank are now weighing whether the uptick in inflation warrants a policy response, particularly if higher energy prices begin to feed into wages and services.

ECB President Christine Lagarde said recently that if inflation deviates significantly from target, the response must be “appropriately forceful or persistent.”

At the same time, policymakers have signalled caution.

Executive board member Isabel Schnabel said, “We have to be vigilant, but there is no need to rush into action,” indicating that the central bank will monitor whether second-round effects emerge.

Financial markets are already pricing in nearly three rate hikes this year from the current level of 2.0%, with expectations building for a potential move at the next policy meeting in late April.

Growth risks add to uncertainty

The inflation rebound comes at a time when economic growth in the euro area is already under pressure.

The ECB recently downgraded its growth forecast, projecting GDP expansion of just 0.9% this year, down from 1.5% in 2025.

It expects inflation to average 2.6% in 2026, assuming energy prices ease in line with earlier market expectations.

However, a prolonged period of elevated oil prices could alter that trajectory significantly.

Gabriele Foa, global credit portfolio manager at Algebris Investments, warned that the growth outlook is deteriorating.

“Euro area GDP growth for the next quarter is now expected to be close to zero and could turn negative under high oil price scenarios,” he said.

In a more severe scenario outlined by the central bank, sustained disruptions to energy supply could push inflation as high as 4.8% by 2027, while further weighing on economic activity.