Germany's March inflation rate is expected to rise to 2.8%, potentially reaching a new high in over a year, with energy prices being the main driver.

Energy prices have surged due to the Middle East conflict, and German inflation may jump to its highest level in over a year.

On March 30, Bloomberg Economics showed that preliminary data for Germany’s main federal states indicate that the year-on-year increase in March consumer prices is likely to rise to 2.8%, well above February’s 2.0%, and reach a more-than-one-year high, in line with the median forecast in economists’ surveys.

The Middle East situation has raised market fears of a repeat of the 2022 inflation crisis. ECB President Lagarde has said that when necessary, she will take decisive and swift action, and is ready to act at any meeting, including the one next month. At present, the money market is pricing in roughly a 60% probability of a rate hike in April.

Energy prices are the key driver

This inflation spike is mainly driven by a sharp increase in energy costs. Bavarian state data show that the year-on-year price of light heating fuels has risen by nearly 45%, and gasoline prices are also up by almost 20%.

Bloomberg Economics analyst Martin Ademmer said that commodity prices will dominate the inflation trajectory in the near term, noting that if oil prices remain above $100 per barrel for the long term, this year’s overall inflation rate average may come close to 3%.

The energy shock stemming from the Middle East fighting has led markets to worry about a repeat of the 2022 inflation crisis. At the time, the euro-zone inflation rate once briefly broke above 10%, and the European Central Bank was heavily criticized for moving too slowly in its response.

ECB under pressure, inflation outlook depends heavily on how the conflict unfolds

Faced with inflation rising again, the ECB has clearly adjusted its communications strategy this time. Lagarde has stated explicitly that she will not be “paralyzed by hesitation” in responding to the impact of the Iran conflict, stressing that she is ready to take action at any meeting.

The ECB Governing Council member and Belgian central bank governor Wunsch had also previously said that if the fighting is not over before June, the likelihood of a rate hike would be higher. Analysts note that the subsequent path of inflation in Germany—and even across the euro zone—depends to a large extent on how the Middle East situation evolves and its continued impact on energy markets.

Bloomberg Economics analyst Martin Ademmer emphasized that the trend in oil prices is the key variable in determining whether inflation can stay elevated. If geopolitical tensions ease in the short term, energy prices may fall and inflation pressure could ease as well; conversely, if oil prices remain high for the long term, there is a risk that the euro-zone inflation core will shift upward systematically, and the ECB’s policy room for maneuver will be further narrowed.

Risk Notice and Disclaimer

        The market is risky; investment requires caution. This article does not constitute personal investment advice, and it does not take into account the special investment objectives, financial conditions, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their specific circumstances. Invest accordingly at your own risk.