Germany’s inflation rate in March is expected to rise to 2.8%, possibly reaching a new high in over a year, with energy prices as the main driving force.

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Affected by the surge in energy prices caused by the Middle East conflict, inflation in Germany may soar to its highest level in more than a year.

On March 30, Bloomberg Economics Research indicated that preliminary data from major German federal states show that the year-on-year increase in consumer prices in March is expected to rise to 2.8%, significantly higher than February's 2.0%, reaching a new high in over a year, in line with the median forecast in economist surveys.

The situation in the Middle East has raised market concerns over a repeat of the 2022 inflation crisis. ECB President Lagarde has stated clearly that the ECB will act decisively and swiftly if necessary, ready to intervene at any meeting, including the one next month. Currently, the money market estimates a 60% probability of a rate hike in April.

Energy Prices Are the Core Driving Force

This round of surging inflation is mainly driven by the sharp rise in energy costs. Data from Bavaria shows that the price of light heating oil rose nearly 45% year-on-year, while gasoline prices also increased by almost 20%.

Martin Ademmer, an analyst at Bloomberg Economics, pointed out that commodity prices will dominate inflation trends in the near term. If oil prices stay above $100 per barrel for an extended period, the annual average inflation rate this year may approach 3%.

The energy shock triggered by the Middle East conflict has led to market concerns that the 2022 inflation crisis may recur. At that time, Eurozone inflation once exceeded 10%, and the European Central Bank faced criticism for its slow response.

ECB Under Pressure, Inflation Outlook Highly Dependent on the Course of the Conflict

Faced with rising inflation again, the ECB has clearly adjusted its communication strategy this time. President Lagarde explicitly stated that they “will not be paralyzed by hesitation” in response to the impact of the Iran conflict, emphasizing readiness to take action at any meeting.

Governing Council member and Belgian Central Bank Governor Wunsch also previously stated that if the conflict does not end by June, a rate hike is likely. Analysts noted that the subsequent path of inflation in Germany and the Eurozone largely depends on the evolution of the Middle East situation and its sustained impact on the energy market.

Bloomberg Economics analyst Martin Ademmer emphasized that oil price trends are the key variable determining whether inflation will remain elevated. If the geopolitical conflict eases in the short term and energy prices fall, inflationary pressure may ease accordingly; on the contrary, if oil prices remain high for an extended period, the Eurozone's inflation center will face the risk of a systemic rise, and the ECB's policy space will be further limited.

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