Iran War Fuels Eurozone Inflation, ECB Rate Hikes Loom

This inflation figure, while slightly below economists' prediction of 2.6%, remains well above the European Central Bank's 2% target level. The surge in energy prices is attributed to the effective closure of the Strait of Hormuz, which handles about a fifth of the world's oil, and Iranian air strikes on Persian Gulf natural gas facilities, on which Europe has become heavily reliant since Russia's 2022 invasion of Ukraine.

European Central Bank President Christine Lagarde indicates the central bank is prepared to respond to even not-too-persistent inflation to prevent second-round effects, with policymakers now seen hiking rates three times in 2026, potentially starting in April or June. Services prices, a significant component of Eurostat consumer price data, dipped to 3.2% in March from 3.4% in February.

ING Chief Economist Bert Colijn warns that the Middle East conflict dominates the inflation outlook, expecting upside risks to food and goods prices due to fertilizer shortages and broader supply chain problems. Separately, French inflation rose to 1.7% (harmonized 1.9%) in March, up from 0.9% (1.1%) in February, primarily due to a 7.3% year-on-year jump in energy inflation.

French economic activity weakened, with services production falling 0.6% in January and household consumption contracting 1.4% in February, making ING's 2026 GDP growth forecast of 0.7% appear optimistic and threatening the government's 5% budget deficit target. Germany's unemployment held steady at 2.977 million in March, defying expectations for an increase of 2,000, with the jobless rate remaining at 6.3%.