Euro zone inflation jumps before likely oil price hit

Euro zone inflation jumps, faces quick hit from surging oil price

Euro Zone Inflation Surges Amid Rising Energy Prices

By Balazs Koranyi

FRANKFURT, March 3 (Reuters) - Euro zone inflation surged unexpectedly last month and may rise further in the coming months if war in the Middle East keeps energy prices high, possibly putting pressure on the European Central Bank to revisit its policy stance.

Inflation in the 21 countries that share the euro jumped to 1.9% from 1.7% a month earlier, outpacing expectations for 1.7%, as rising unprocessed food and services costs offset low energy prices, data from Eurostat showed on Tuesday.

Underlying inflation, a closely watched measure which excludes volatile fuel and food prices, increased to 2.4% from 2.2% as services inflation, a top concern for policymakers, once again accelerated more than predicted.

Immediate Impact of Energy Prices

February's Inflation Figure and Market Reactions

FEBRUARY'S INFLATION FIGURE 'NOT GOOD NEWS'

"February’s higher than expected inflation figure are certainly not good news and add to concerns resulting from the start of the conflict in the Middle East," Diego Iscaro at S&P Global Market Intelligence, said.

"Higher oil and gas prices, supply chain disruptions and a softer euro are all inflationary," Iscaro added.

Fuel retailers pass surging costs onto drivers in a matter of days, so the price impact could be immediate if the conflict continues to limit energy production or shipments beyond a few days. 

JP Morgan's Inflation Estimates

JP Morgan estimates that a 10% increase in Brent crude oil prices calculated in euros would lift headline inflation by 0.11 percentage points within three months.

On that basis, the energy price move seen in the past week would lift inflation by about 0.2 percentage points, if prices stabilised at their current level, it argued.

ECB Policy and Future Outlook

ECB's Response to Inflation Trends

Inflation was projected to run below the ECB's 2% target in both 2026 and 2027, so an increase, if indeed contained, may not put immediate pressure on the ECB to raise interest rates, especially since policy acts with long lags and does little to dampen price pressures in the near term.

Risks and Scenarios if Conflict Persists

CLEAR UPSIDE RISKS IF CONFLICT DRAGS ON

But economists see clear upside risks now, especially if the conflict drags on.

"If the conflict continues for a few weeks, expect inflation to rebound to the mid-2% range," ING economist Bert Colijn said. "But if a significant disturbance to energy supply lasts longer, the impact is bound to become larger, which means that uncertainty around the inflation outlook is returning."

Financial markets see no change in the ECB's 2% deposit rate for now but see a one in two chance of a rate hike toward the end of the year.

The ECB normally looks through energy-induced inflation volatility but may not be as patient as it was in 2022, when it was late in recognising the inflation surge and had to lift rates at a record pace to contain prices.

The ECB is also likely to be more alert as domestic inflation has been holding above target for years and only an earlier fall in oil prices pulled the measure below target. 

Such a setting would suggest that the ECB stays put as long as the price surge looks like a one-off but may act quickly if longer-term expectations or wage-setting behaviour started to change. 

The bank will next meet on March 19 and a policy change is unlikely as the bank only acts on persistent changes in financial conditions and would need more evidence that the war had caused permanent changes in how the economy works.

(Reporting by Balazs Koranyi; Editing by Kate Mayberry and Bernadette Baum)