By Ed Frankl
Eurozone consumer prices rose at the fastest pace in more than a year this month as the war in Iran pushed energy prices upward, a move that if sustained might prompt the European Central Bank to raise its key interest rate.
Prices were 2.5% higher than a year earlier, the fastest increase since January 2025, the European Union's statistics agency said Tuesday. The annual rate of inflation was 1.9% in February.
The rebound in inflation was expected, propelled by energy prices rising by 4.9%. That was the first annual increase since February 2025. A consensus of economists polled by The Wall Street Journal expected headline inflation at a higher 2.7%.
Higher energy prices have pushed inflation above the ECB's 2% target for the first time since November. Brent crude prices have climbed more than 50% to more than $100 a barrel since the first U.S. and Israeli strikes on Iran on Feb. 28.
There were few signs of second-round inflationary effects, when higher energy costs feed into prices of other goods and services. That can happen when workers demand and get higher wages to cover their higher energy bills, leading their employers to raise the prices of the goods and services they provide. Core inflation, which strips out energy and food prices, fell to 2.3%, from 2.4% in February, as services inflation eased.
Policymakers at the ECB will be weighing whether and when to respond to the pickup in inflation.
ECB President Christine Lagarde in a speech last week said that should inflation deviate significantly from target, the response must be appropriately forceful or persistent.
Her colleague on the executive board, Isabel Schnabel, said that policymakers will be looking for signs the energy-price jump has led to a pickup in inflation in other goods and services, and therefore higher wage demands.
"We have to be vigilant but there is no need to rush into action," Schnabel said.
Still, investors currently price in nearly three rate hikes this year from the current level of 2.0%, according to LSEG data, with most expecting the first at the next meeting on April 30.
The ECB at its March meeting upgraded its inflation projections and downgraded its economic-growth forecasts. It now expects inflation to average 2.6% in 2026, while GDP growth is forecast at 0.9% this year, down from 1.5% in 2025. However, that is only if oil prices come back down in line with market expectations of as of mid-March.
The bank also presented a number of scenarios dependent on the development of the conflict in the Middle East.
In its "severe" scenario, damage to energy facilities would lead to oil and natural-gas prices remaining high beyond the end of this year, with inflation peaking at an average of 4.8% in 2027.
The war has already weakened confidence in the eurozone, an indication that growth is set to slow. On Monday, European Commission data showed businesses and consumers across the 21-nation currency area felt more pessimistic about their prospects. Firms' selling price expectations jumped, while consumer inflation expectations also rose sharply.
In separate data released Tuesday, the unemployment rate in Germany--the eurozone's largest economy--held steady, though rising uncertainty is likely to place great strain on the labor market in the coming months.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
03-31-26 0547ET
