Preliminary data from Eurostat shows Eurozone inflation accelerated to 2.5% year-on-year in March, up from 1.9% in February, marking the fastest pace in over a year. The increase was primarily driven by a sharp rebound in energy costs, which rose 4.9% after a 3.1% decline the previous month, largely due to the surge in global crude oil prices following the escalation of conflict involving Iran in late February. Brent crude prices have climbed more than 50% to above $100 a barrel.
This headline figure pushed inflation above the European Central Bank's (ECB) 2% target for the first time since November, creating a policy dilemma. However, underlying price pressures showed signs of easing, with core inflation (excluding energy and food) edging down to 2.3% from 2.4%. Services inflation moderated slightly to 3.2%, while food price growth slowed to 2.4%.
The ECB now faces the challenge of balancing inflation containment with supporting fragile economic growth, with its GDP forecast for 2026 downgraded to 0.9%. Policymakers, including President Christine Lagarde and Executive Board member Isabel Schnabel, have signaled vigilance but caution against rushing into action. Financial markets are pricing in nearly three interest rate hikes this year from the current 2.0% level.
Economists warn the outlook is highly uncertain. Andrew Kenningham of Capital Economics stated the persistence of inflation "will depend on the duration and severity of the Iran conflict." Gabriele Foa of Algebris Investments warned that Eurozone GDP growth could turn negative under high oil price scenarios. The ECB's own severe scenario projects inflation could reach as high as 4.8% by 2027 if energy supply disruptions are sustained.
