Eurozone March inflation rate surges to 2.5%, the largest increase since 2022, intensifying expectations of interest rate hikes.

The situation in the Middle East is driving up energy costs, Eurozone inflation in March hit the largest increase since 2022, and the market is betting that the European Central Bank will begin rate hikes as early as next month.

Data released by the European Union statistics office on Tuesday showed that consumer prices in the Eurozone rose 2.5% year on year in March, jumping sharply from 1.9% in February. This is the highest level since January 2025 and also the largest month-on-month inflation jump since 2022. With the Middle East conflict continuing, the impact of elevated energy prices is accelerating across Europe, and many governments and central banks have already lowered their growth forecasts.

After the inflation data was released, market expectations for the ECB to raise rates by two to three times over the course of the year remained basically unchanged, with the first move possibly landing in April at the earliest. Madis Muller, governor of the Bank of Estonia, said on Tuesday that, given the current situation, when setting the baseline scenario under the assumptions locked in for March, it could “more or less be regarded as an optimistic scenario,” and he also made it explicit that “If energy prices remain high for the long term, an adjustment of interest rates in April is by no means impossible.”

Although March’s inflation data was slightly below the Bloomberg survey’s median forecast of 2.6%, core inflation also unexpectedly eased to 2.3%. Several ECB officials warned that the risk of further acceleration in inflation should not be ignored, and the upward wage-price spiral must be closely monitored and prevented.

Energy shock drives the move; core inflation cools unexpectedly

The main driver behind this round of price increases comes from energy costs, closely tied to the sustained rise in international oil and gas prices following the outbreak of the Middle East conflict.

Core inflation (excluding highly volatile items such as food and energy) also unexpectedly fell to 2.3%, below the prior reading. Service-sector prices also slowed somewhat. This divergence adds an even more complex backdrop to the policy discussions inside the ECB.

Bloomberg Economics research analysts Simona Delle Chiaie and David Powell noted that the above data suggests that the March inflation impact caused by the recent surge in benchmark commodity prices in the ECB’s baseline scenario may be “slightly overestimated,” which could provide grounds for dovish members of the committee to keep rates unchanged in April.

Inflation diverges across countries; Germany and Spain lead the increases

In the Eurozone, March’s inflation trend showed a marked divergence. Germany and Spain, which have already released data, saw a clear acceleration in inflation; their year-on-year increases were 2.8% and 3.3%, respectively. France’s inflation rose somewhat but still remained below 2%. Italy, meanwhile, unexpectedly held steady at 1.5%, with no sign of a pickup.

Among them, Germany’s inflation climbed to its highest level in more than a year, closely related to war-driven energy price increases. The EU’s harmonized CPI year-on-year rise across most major economies shows a broad-based pattern of price increases. Analysts expect that overall Eurozone inflation will further rise, continuing to weigh on the ECB.

The ECB focuses on second-round effects; officials send hawkish signals

Given the reality that the ECB cannot directly intervene in energy-market volatility, it has shifted the policy focus to preventing second-round effects, namely the transmission of higher energy prices into wage growth and the prices of other goods. A linked rise in fertilizer and food prices has also raised concerns for the ECB, because such changes will directly affect household inflation expectations.

A survey released on Monday showed that consumers’ March inflation expectations jumped sharply, and businesses also expect to raise product prices significantly. In the market, long-term inflation swaps surged quickly early after the outbreak of the war, then subsequently eased as pricing adjusted to expectations of rate hikes.

Multiple ECB officials have already sent more explicit signals. Peter Kazimir, governor of the Slovak central bank, said that the longer the Middle East conflict lasts and the more destructive it becomes, the greater the inflation risk—therefore a response must be made as early and as decisively as possible. Boris Vujcic, governor of Croatia’s central bank, said that the acceleration in inflation is “in line with expectations.” Fabio Panetta, governor of the Bank of Italy, emphasized that inflation expectations must be monitored closely to prevent the formation of a wage-price spiral, while also ensuring that monetary policy actions remain appropriately paced.

Sustained high oil and gas prices have put pressure on the ECB’s baseline forecast for this year’s average inflation of 2.6%. According to the ECB’s extreme-scenario calculations, the maximum price increase could reach a peak of 6.3% in 2027.

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