Key Takeaways
- Eurozone flash inflation data due Tuesday is forecast to show a jump due to higher energy prices.
- Rising energy inflation tends to ripple through supply chains and drive price increases in other segments.
- Markets have shifted their expectations for ECB policy, from pricing in steady or lower rates to pricing in several rate hikes this year.
Preliminary eurozone consumer prices, due March 31, are forecast to be 2.7% higher year over year, according to FactSet consensus estimates. That is well above Eurostat’s final inflation reading of 1.9% for February, and above the European Central Bank’s medium-term inflation target of 2%, as energy prices have surged since the war in the Middle East broke out on Feb. 28.
This has prompted a sharp shift in expectations for the ECB: Futures markets now price in two to three 0.25 percentage point rate hikes in 2026, with a first move as early as June increasingly likely.
“The magnitude of the rise in energy prices means that we expect some spillover effects into food and core prices as well,” says Ángel Talavera, chief European economist at Oxford Economics.
Core inflation, which excludes volatile components such as energy and food, is seen at 2.3% year over year, slightly down from February’s 2.4%. This suggests that the increase in headline inflation is largely the result of higher oil prices, according to Michael Field, Morningstar’s chief European markets strategist.
Gasoline and diesel prices have risen between 20% and 35% across the eurozone in March alone, says Ulrike Kastens, senior economist at DWS. She also expects headline inflation to come in at 2.7% in March, with a chance of inflation surpassing 3% in April.
Goldman Sachs expects year over year energy inflation to increase to 5.9% from -3.1% in February, although uncertainty is very high. Services inflation, which was the key overall inflation driver in recent months, is estimated at 3.3% year over year, with goods inflation ticking down to 0.6%.
What Is the Inflation Outlook for 2026?
The impact of the destruction of energy infrastructure in the Middle East will be felt on global energy markets for months and years to come, economists say. According to Reuters, Iranian attacks have knocked out around 17% of Qatar’s liquefied natural gas export capacity. Qatar is one of Europe’s key suppliers.
“Even if a way will be found to end direct hostilities relatively soon, the unintended consequences of the Iran conflict will be felt much longer than the few weeks initially announced,” says Alain Bokobza, head of global asset allocation at Société Générale.
“Until decisive military intervention or diplomacy succeeds in changing the situation, the Strait of Hormuz will remain closed for most vessels. Retaliatory attacks on neighboring Gulf states have seriously damaged LNG production capacity for many months to come,” he adds. “Inflation expectations have surged, triggering a simultaneous selloff in both equities and bonds alongside a hawkish turn at central banks around the globe.”
The ECB raised its inflation outlook on March 19, now expecting headline inflation to average 2.6% in 2026, up from 1.9% in December. The outlook for 2027 was raised to 2.0% from 1.8%.
Oxford Economics sees inflation in the eurozone averaging 2.9% in 2026, nearly double the 1.7% rate it had expected prior to the Iran war.
Is Europe Facing a 2022-Style Inflation Shock?
Ralph Solveen, head of economic research at Commerzbank, argues that while the current energy shock has revived memories of 2021 and 2022, key differences suggest inflation will be much more contained this time. Energy prices have risen far less than during the previous crisis, and major drivers of the earlier surge—such as supply chain disruptions, food shortages, a pandemic-driven shift in demand and skyrocketing freight rates—are either weaker or absent. Even if the war drags on, Commerzbank says the inflation rate is unlikely to rise nearly as sharply as it did four years ago, and it expects levels around 3%, rising to 4% if the war escalates further.
Tiffany Wilding, managing director and economist at Pimco, says the 2022 energy shock as Russia attacked Ukraine “collided with a postpandemic economy shaped by pent-up demand, government stimulus, and tight labor markets, amplifying inflation.”
“Today, fiscal policy is tighter, labor markets are looser, and policy rates are already neutral to restrictive, reducing the risk of sustained inflation,“ she adds.
How Many Times Will the ECB Raise Interest Rates in 2026?
Oxford Economics’ Talavera says that under a new baseline, “we think the ECB will hike rates in June and July to keep inflation expectations in check and to signal they are not willing to repeat the mistakes of the 2021-22 energy crisis. We expect the ECB to undo these hikes fairly quickly in 2027, but if the crisis extends, the risks of deeper rate cuts to offset the hit to growth will rise.”
Other economists are less convinced of the rate hiking path that financial markets have begun to price in.
Ulrike Kastens of DWS is convinced the ECB will move slowly. “So far, our baseline scenario has been for unchanged interest rates this year. However, futures markets are now pricing in rate hikes, with expectations varying significantly depending on how the political situation between the US and Iran develops. Given the shifting geopolitical landscape, risks have tilted toward a more restrictive monetary policy by the ECB, but we do not expect a hasty move. A wait-and-see approach still appears appropriate.“
Commerzbank’s Solveen also does not expect the ECB to act immediately, but says that unlike in 2021 and 2022, the central bank will not wait until inflation reaches 8% before responding. “Even with an inflation rate of 3%, it will likely point to the temporary nature of the stronger price increase. However, if inflation reaches 4% as a result of a further escalation of the war, it is likely to act, as significant second-round effects would then be a threat.”
Morningstar’s Field says the central bank is “walking a tightrope, attempting to stimulate the economy without igniting inflation. With inflation now on the rise, the bank is leaning the other direction to compensate.”
Is the Eurozone Headed for Stagflation?
The energy shock and its implications have also prompted economists to lower their eurozone growth outlooks.
Deutsche Bank has sharply downgraded its 2026 GDP growth forecast to 0.5% from 1.1% amid conflict in the Middle East. ECB economists also lowered their 2026 growth projection earlier in March to 0.9%, from 1.2% in December.
Energy supply shocks are stagflationary, says Pimco’s Wilding. Stagflation is a situation where inflation is high while economic growth is weak and unemployment rises, leaving policymakers with limited options to address both at the same time. “Higher energy prices are sharpening existing divides between winners and losers—and creating new ones—across countries, sectors, businesses, and households,” she says.
