Euro zone inflation surges past ECB target on oil shock
Eurozone inflation has risen above the European Central Bank’s two percent target due to rising oil and gas prices; It has increased the policy dilemma as expensive energy risks dragging down growth and creating a self-reinforcing inflationary 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 increase from stagnating in the prices of other goods and services.
Overall inflation in the 21 countries that share the euro currency rose to 2.5 percent in March from 1.9 percent the previous month, below expectations of 2.6 percent in a Reuters poll of economists, as energy costs rose 4.9 percent.
“The previously price-stable environment is saying goodbye,” said Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe.
“The important thing is that this inflationary mess is not reflected in the core interest rate.”
The closely watched figure for headline inflation, which excludes volatile food and energy, fell to 2.3 percent from 2.4 percent, according to data released by the EU’s statistical agency Eurostat on Tuesday.
Basic economic theory holds that central banks should move beyond one-off price shocks resulting from supply disruptions, especially given that monetary policy operates with long lags.
But if companies begin to reflect this in sales prices and workers begin to demand higher wages for the loss of disposable income, a rapid rise in energy inflation could easily become widespread.
Joerg Kraemer, Commerzbank’s chief economist, said higher energy prices would make other goods increasingly expensive and drive up core inflation, predicting that headline inflation would rise above three percent by May unless the war ends quickly.
ECB President Christine Lagarde said last week that the public may begin to doubt the ECB’s resolve if it remains idle, strengthening the argument for rate hikes even in the event of large but not very persistent inflationary attacks.
Financial markets now expect the ECB to raise three interest rates in 2026, with the first in April or June.
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