Eurozone Inflation at Risk of Trending Higher over War in Middle East

Why It Matters

Higher inflation erodes consumer purchasing power and could force the ECB to adjust its neutral stance, impacting monetary conditions across the eurozone. Energy‑supply shocks from the conflict add uncertainty to growth forecasts and fiscal planning.

Key Takeaways

• Core inflation rose to 2.4% in February.
• Overall HICP increased from 1.7% to 1.9%.
• Energy supply vulnerability heightened by LNG price surge.
• Mid‑2% inflation likely if conflict persists weeks.
• ECB remains cautious, unlikely to tighten immediately.

Pulse Analysis

The eurozone’s February harmonised index of consumer prices (HICP) nudged higher, with headline inflation climbing from 1.7 % to 1.9 % and core inflation edging up to 2.4 %. Unlike the previous months, the energy component contributed less to the rise, indicating that underlying price pressures in services and goods remain sticky. Economists had expected inflation to stay comfortably below the European Central Bank’s 2 % target for most of 2026, but the data suggest that the disinflation process is losing momentum.

The escalation of hostilities in the Middle East has instantly reshaped global energy markets, pushing liquefied natural gas (LNG) spot prices to multi‑year highs. The eurozone’s growing reliance on imported LNG amplifies its exposure to supply shocks, and any prolonged disruption could feed directly into domestic electricity and gas tariffs. Analysts project that if the conflict endures for several weeks, inflation could rebound into the mid‑2 % range, eroding recent gains in consumer purchasing power and adding uncertainty to growth forecasts across the bloc.

Against this backdrop, the European Central Bank is likely to adopt a wait‑and‑see stance. While Chief Economist Philip Lane has warned of a possible renewed spike, the current policy settings remain neutral, and the ECB is reluctant to tighten rates on a single energy shock. Market participants therefore price in modest rate‑sensitivity, focusing instead on the duration of the conflict and the trajectory of core inflation. A prolonged energy supply crunch could force the ECB to reconsider its accommodative posture, potentially reshaping monetary conditions in the second half of the year.