(March 30): German inflation accelerated sharply in March after the Iran war boosted energy costs, supporting the idea that the European Central Bank (ECB) will have to raise interest rates.
Consumer prices rose 2.8% from a year ago — faster than February’s 2% advance — the statistics office said on Monday. That’s the highest level in more than a year and matches the median estimate in a Bloomberg survey.
Energy costs soared by 7.2% — the first increase since December 2023. A gauge stripping out volatile items like fuel and food was unchanged at 2.5%.
With the fighting in the Middle East now in its fifth week, the effect of costlier oil and gas is showing up in European prices and consumers’ views on where inflation is headed. While ECB president Christine Lagarde has vowed to act decisively and swiftly if needed, officials say they won’t rush as they assess the full consequences.
Money markets anticipate a rapid reaction and are leaning towards a rate hike already at April’s meeting. They’re pricing as many as three moves over the whole year.
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“The rise in inflation in March is just the beginning — higher energy costs will eat their way through supply chains in the coming months, unless the war ends quickly,” Commerzbank chief economist Joerg Kraemer said. “The ECB is coming under increasing pressure to raise interest rates.”
Germany’s numbers follow a jump in Spanish inflation, to 3.3%, though the increase fell short of analyst estimates. Figures from France and Italy are due on Tuesday, along with a reading for the euro zone that’s set to hit 2.6% — the highest since July 2024.
There are signs in Germany that some don’t expect a speedy resolution to the energy issues, with a survey by the Ifo institute published earlier on Monday showing significantly more firms are preparing to raise prices. A separate European Commission poll put inflation expectations among consumers at their highest level since 2022.
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“The surge in energy prices after the start of the Iran war halted Germany’s disinflation and could push average inflation towards 3% this year, versus a pre-war forecast of sub-2%. With a less tight labour market than during the 2022 energy crisis, pass-through to core inflation may remain modest, and core price growth should ease further this year,” says Martin Ademmer of Bloomberg Economics.
Policymakers have a “duty” to avoid such beliefs becoming entrenched, French central bank chief Francois Villeroy de Galhau told La Stampa. Greece’s Yannis Stournaras warned that a lengthier war could trigger stagflation and a deviation from the ECB’s baseline scenario, which envisages prices rising in line with the 2% target over the medium term.
The ECB has been criticised for reacting too slowly to the energy shock that followed Russia’s invasion of Ukraine four year ago. Inflation spiraled past 10% and policymakers were forced to hike borrowing costs aggressively to bring it back down.
While the root cause of the current crisis — a surge in energy prices — is similar, officials stress that the eurozone isn’t as vulnerable because demand is weaker, the labour market is solid and monetary-policy settings are more neutral.
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