ECB economist warns of spike in inflation from war

Eurozone inflationary pressures had not fully eased even before the outbreak of war in the Middle East, with February data showing a pick-up in both headline and core inflation.

Inflation rose to 1.9 per cent in February from 1.7 per cent a month earlier, while core inflation, which strips out volatile energy and food prices, accelerated to 2.4 per cent from 2.2 per cent.

The increase was seen in both services and goods, emphasising price pressures remained firmer than expected.

Although energy prices still made a negative contribution in February, that drag was smaller than in January, adding to signs that disinflation in the eurozone was losing momentum even before the latest geopolitical shock.

The war in the Middle East has added fresh upside risks to the inflation outlook, mainly through its impact on energy supply and prices.

The eurozone remains vulnerable because it now relies more heavily on liquefied natural gas, while global LNG prices have jumped sharply since the weekend.

Should the conflict drag on for several weeks, inflation could return to the mid-2 per cent range.

A longer-lasting disruption to energy supply would likely have a bigger effect, not only on prices but also on growth, reviving uncertainty around an inflation outlook that had appeared broadly stable around the European Central Bank’s target.

European Central Bank (ECB) chief economist Philip Lane has already warned that recent developments could trigger a renewed rise in inflation.

However, while the central bank is expected to remain on high alert, it is unlikely to react hastily to every move in energy prices, given that inflation remains relatively contained for now, interest rates are seen as neutral rather than accommodative, and the outcome of the conflict remains highly uncertain.