Key Takeaways
- Gas storage levels are well below seasonal norms, leaving Europe more exposed to supply shocks.
- The shift to liquefied natural gas has reduced reliance on Russia but increased competition with Asia, making prices more volatile.
- Higher energy costs are already weighing on industrial output and could further weaken eurozone growth in 2026.
Just when inflation in Europe appeared to be under control, a new geopolitical shock has injected fresh uncertainty into markets.
Both Brent crude and European benchmark TTF gas prices have surged. Brent has risen by 51% and TTF has jumped by 60% since the US-Israeli attacks on Iran began on Feb. 28, raising the risk of a renewed energy-driven inflation surge.
European gas prices were already elevated after a cold winter, and the Iran war, halting liquefied natural gas production by QatarEnergy, has added further upward pressure on gas prices, says Morningstar equity analyst Tancrede Fulop. Stock and bond markets have also reacted sharply, with prices seesawing as investors assess unfolding events.
For Europe, the implications go beyond short-term volatility. Higher energy prices are likely to feed through into household heating bills and overall consumer prices, while already weak activity in energy-intensive industries faces even greater cost pressure.
The expected rise in inflation may also alter the European Central Bank’s policy path. Futures markets have shifted, from pricing in stable or lower rates in February before the war broke out, to anticipating three rate hikes in 2026.
Energy Price Inflation: What Is Different This Time?
The resurgence of energy inflation brings back memories of the shocks seen in 2021 and 2022, though this time, tight supply is the primary driver.
By contrast, in 2022, the dual effect of rising demand as economies rebounded from the covid-19 pandemic exacerbated the supply shock resulting from Russia’s full-scale invasion of Ukraine.
In addition, Russian gas flows were already falling short of expectations. “Gazprom already cut supplies to European buyers and left gas-storage facilities that it operated in the EU empty in autumn 2021,” according to Bruegel, a think tank based in Brussels.
The war in Ukraine then turned a tight market into a full-blown crisis. Energy inflation surged to about 52.6 % year on year in October 2022, pushing overall inflation into double digits and prompting the ECB to begin its rate-hiking cycle in mid-2022.
By 2025, energy inflation had largely subsided, with services inflation becoming the main source of price pressures.
Now, the escalation in the Middle East risks reigniting similar dynamics. Oil and gas prices propelled eurozone inflation back above the ECB’s 2% target in March, with an overall reading of 2.5%.
“The inflation rate is likely to rise further in the coming months if a prolonged war causes energy prices to rise further and higher gas prices gradually reach private households. Food inflation could also pick up again in the medium term,” says Ralph Solveen, head of economic research at Commerzbank.
Still, the inflation shock is unlikely to match the extremes of 2021-2022, as key triggers such as supply chain breakdowns and pandemic-related demand spikes are weaker or no longer present.
“Consequently, even if the war drags on, the inflation rate is unlikely to rise nearly as sharply as it did four years ago. We do not expect double-digit peaks as we did back then, but rather inflation rates of around 3%; if the war escalates further, rates could reach 4%,” Solveen says.
Gas Storage: Europe’s Reserves Have Dwindled
The renewed supply-side disruption comes at a time when gas storage levels are relatively low. After a cold winter, European storage sites are only about 28.5 % full, which is below the seasonal average.
Storage acts as a buffer against supply shocks. When inventories are high, disruptions can be absorbed. When they are low, price reactions tend to be sharper and more immediate.
This leaves Europe exposed amid heightened geopolitical risk. Any prolonged disruption to energy flows—particularly through key routes such as the Strait of Hormuz—could quickly translate into supply shortages as storage operators seek to refill facilities for the coming winter.
Gas Imports: Dependency Has Shifted, Not Disappeared
Until late February, energy markets were relatively calm as flows from Norway remained steady. US LNG has replaced much of the lost Russian pipeline gas, which remains under sanctions.
However, this shift comes with new vulnerabilities. LNG is globally traded and goes to the highest bidder. In a crisis, Europe is forced to compete with other regions, chiefly Asia, for cargoes from the US.
The Middle East currently plays a smaller role in European imports. Qatar remains the EU’s only major supplier from the region, but shipments have declined in recent months—even before Iranian attacks disrupted about 17% of Qatar’s LNG export capacity and shipping through the Strait of Hormuz.
Demand: Adjustment Comes at an Economic Cost
Europe has adapted to the energy shock—but at a cost.
Gas demand remains below precrisis levels, particularly in industry and households. This reflects efficiency gains but also weaker output in energy-intensive sectors. In January 2026, compared with January 2025, industrial production decreased by 1.2% in the euro area and by 0.6% in the EU, according to the latest Eurostat data. Compared with January 2022, the last full month before Ukraine war began, industrial production in the euro area and EU27 is down by 4.2% and 3.0%, respectively.
Deutsche Bank has sharply downgraded its eurozone growth outlook in its latest baseline scenario, cutting its 2026 forecast to 0.5% from 1.1% amid rising tensions in the Middle East. ECB staff also lowered their 2026 growth projection in early March to 0.9%, from 1.2% in December.
