Inflation in the eurozone unexpectedly accelerated. How does the conflict in the Middle East threaten the EU?

Inflation in the eurozone in February surprised and rose to 1.9%. The result was slightly higher than analysts had expected. But at the same time, for the first time since April 2021, price growth remained below the European Central Bank's 2% target for the second month in a row, the Financial Times (FT) reported

Inflation in the eurozone, according to preliminary data, in February will amount to 1.9% in annualized terms, Eurostat reported. In monthly terms, price growth amounted to 0.7%.

The eurozone inflation figure was slightly above economists' forecast of 1.7% and 0.2 percentage points higher than in January, the FT noted. These data were recorded even before the expansion of the military conflict in Iran involving the US and Israel triggered a sharp rise in oil prices this week, the newspaper explained.

The European Central Bank will hold its next meeting on March 19. It is expected to leave its key interest rate at 2% for the sixth consecutive time. But traders now allow a 50% chance of a 0.25 percentage point rate hike before the end of 2026, the FT reported. As recently as last week, market participants allowed for a slight possibility of a further rate cut, it added.

Higher-than-expected inflation is "definitely not good news" and adds to fears of war in the Middle East, S&P Global Market Intelligence economist Diego Iscaro told the FT. "The inflation picture is now much less certain," he said.

February's data was partly influenced by the Iranian war, which "was already casting its shadow" as rising tensions drove up energy prices, Commerzbank economists said.

ECB chief economist Philip Lane said in an interview with the FT that permanent disruptions in oil and gas supplies from the Middle East could lead to a "significant spike" in inflation and a "sharp fall in output". Lane said the scale of the shock would depend on the "breadth and duration of the conflict," with the impact likely to be amplified if the situation leads to a reassessment of risks in financial markets. The ECB intends to "closely monitor developments" based on the scenario analysis published in December 2023.

According to the ECB's model, in the event of a disruption of one-third of oil and gas supplies through the Strait of Hormuz, oil prices could rise by more than 50% (to around $130 per barrel), dragging down eurozone economic growth next year by 0.6 pp below forecast, while inflation could be more than 0.8 pp higher than expected.

Growth in oil prices accelerated at the auction on March 3: quotes added more than 9% and exceeded $85 per barrel. The cost of raw materials reached the maximum since mid-July 2024. U.S. oil WTI grew by 7.2% - to $76.4 per barrel. Analysts expect oil prices to remain at elevated levels in the coming days as markets assess the consequences of the escalation of the conflict, writes Reuters.

This article was AI-translated and verified by a human editor