Euro zone inflation rose more than expected last month but remained below the European Central Bank's 2% target, fresh data showed today, before a likely hit from surging oil and gas prices.
Inflation in the 21 countries that share the euro jumped to 1.9% from 1.7% a month earlier, outpacing expectations for 1.7%, as rising food and services costs offset low energy prices, data from Eurostat showed.
Underlying inflation, which excludes volatile fuel and food prices meanwhile increased to 2.4% from 2.2% as services inflation once again accelerated more than predicted.
The figures, though surprisingly high, carry only modest relevance now as policymakers will be focusing on how war in the Middle East and the resulting more than 10% surge in oil prices could affect inflation and economic growth.
Fuel retailers pass surging costs onto drivers in a matter of only days, so the price impact could be quite immediate, if the conflict continues to limit energy production or shipments beyond just a few days.
JP Morgan argues that a 10% increase in Brent crude oil prices calculated in euros would lift headline inflation by 0.11 percentage points within three months.
On that basis, the energy price move seen in the past week would lift inflation by about 0.2 percentage points, if prices stabilised at their current level, it argued.
However, inflation was projected to run below target in both 2026 and 2027, so an increase, if indeed contained, may not put immediate pressure on the ECB to raise interest rates, especially since policy acts with long lags and does little to dampen price pressures in the near term.
Indeed, financial markets see no change in the ECB's 2% deposit rate all year and there has also been no meaningful uptick in longer-term inflation expectations, indicating that the war was unlikely for now to dislodge the ECB from its "good place".
"Given that headline inflation is still expected to remain below 2% in 2026–27, there is no immediate need for ECB policy action," Societe Generale said in a note.
"Only a persistent and substantially larger increase in oil prices - well above $10 a barrell - and evidence of durable second‑round effects would justify a tightening response," it added.
But the ECB may not be as patient as it was in 2022, when the bank was late in recognising the inflation surge and had to lift rates at a record pace to contain prices.
The ECB is also likely to be more alert as domestic inflation has been holding above target for years and only an earlier fall in oil prices pulled the measure below target.
Such a setting would suggest that the ECB stays put as long as the price surge looks like a one-off but would act quickly if longer-term expectations or wage-setting behaviour started to change.
The bank will next meet on March 19 and a policy change is highly unlikely as the bank only acts on persistent changes in financial conditions and would need more evidence that the war had caused permanent changes in how the economy works.
