Eurozone inflation rate surged to 2.5% in March, marking the biggest increase since 2022, with strong expectations of interest rate hikes.

The situation in the Middle East is pushing up energy costs, with Eurozone inflation in March seeing its largest increase since 2022. The market is betting that the European Central Bank may begin raising interest rates as soon as next month.

Data released by Eurostat on Tuesday shows that Eurozone consumer prices rose 2.5% year-on-year in March, jumping sharply from 1.9% in February, marking the highest level since January 2025 and the largest monthly increase since 2022. The ongoing conflict in the Middle East and persistently high energy prices are accelerating their impact in Europe, with multiple governments and central banks already revising down their economic growth forecasts.

After the release of the inflation data, market expectations for two to three rate hikes by the European Central Bank this year remain largely unchanged, with the first move possibly happening as early as April. Estonian Central Bank Governor Madis Muller said Tuesday that, given the current situation, the baseline scenario set when locking assumptions in March "could be regarded as an optimistic scenario," and stated clearly "If energy prices remain high for a long time, a rate adjustment in April is definitely possible."

Although the March inflation figure is slightly below Bloomberg's survey median of 2.6%, core inflation unexpectedly slowed to 2.3%. Several ECB officials warned that the risk of further acceleration in inflation cannot be ignored, and the wage-price spiral must be closely monitored.

Energy shock dominates, core inflation surprisingly cools

The main driver of this round of price increases comes from energy costs, which is closely linked to the ongoing rise in global oil and gas prices following the outbreak of the Middle East conflict.

Core inflation (excluding volatile items like food and energy) unexpectedly fell to 2.3%, lower than the previous value; service sector prices also slowed. This divergence adds more complexity to policy discussions within the ECB.

Bloomberg Economics analysts Simona Delle Chiaie and David Powell noted that the data suggests the ECB's baseline scenario may slightly overestimate the impact of soaring commodity prices on March inflation, providing dovish members of the Governing Council with reasons to keep rates unchanged in April.

Inflation divergence among countries, Germany and Spain lead increases

Eurozone inflation in March showed significant divergence. Data already published for Germany and Spain shows accelerated inflation, with year-on-year increases reaching 2.8% and 3.3% respectively; France saw inflation rise but still stayed below 2%; Italy unexpectedly remained at 1.5% with no signs of heating up.

In particular, German inflation rose to its highest level in over a year, closely linked to war-driven energy price increases. Most major economies saw their EU harmonized CPI rise year-on-year, reflecting widespread price increases. Analysts expect overall Eurozone inflation will continue to rise, posing persistent pressure on the ECB.

ECB focuses on second-round effects, officials send hawkish signals

Facing the reality that it cannot directly intervene in energy market volatility, the ECB's policy focus is on preventing second-round effects, namely the transmission of energy price increases to wages and other goods prices. Fertilizer and food prices rising together also concerns the ECB, as such changes directly affect household inflation expectations.

A survey published Monday showed consumer inflation expectations for March surged, and companies also anticipate raising product prices significantly. In the market, long-term inflation swaps spiked at the outbreak of war but have since moderated with changing rate hike expectations.

Several ECB officials have given clearer signals. Slovak Central Bank Governor Peter Kazimir said the longer and more destructive the Middle East conflict, the greater the inflation risks, meaning responses must be earlier and more decisive. Croatian Central Bank Governor Boris Vujcic said the acceleration in inflation is "within expectations." Italian Central Bank Governor Fabio Panetta emphasized the need to closely monitor inflation expectations, prevent the formation of a wage-price spiral, and ensure monetary policy remains moderate.

Persistently high oil and gas prices are already putting pressure on the ECB’s baseline forecast for an average inflation rate of 2.6% this year. According to the ECB’s extreme scenario estimates, price increases could peak at 6.3% in 2027.

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