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.

Ask AI · Can easing in the Middle East situation relieve the inflation crisis?

Driven by the Middle East conflict pushing up energy prices, Germany’s inflation may surge to its highest level in more than a year.

On March 30, Bloomberg Economics showed that preliminary data from Germany’s main federal states indicate that the year-over-year increase in March consumer prices is likely to rise to 2.8%, well above February’s 2.0%, marking the highest level in more than a year, consistent with the median forecast in economists’ surveys.

The Middle East situation has raised market fears that the 2022 inflation crisis could repeat. ECB President Lagarde has said that, if necessary, she will act decisively and swiftly, ready to step in at any meeting, including one next month. At present, money markets estimate the probability of a rate hike in April at about 60%.

Energy prices are the core driver

This inflation jump is mainly driven by a sharp spike in energy costs. Data from Bavaria shows that the price of light heating fuel is up nearly 45% year over year, and the increase in gasoline prices is also close to 20%.

Martin Ademmer, an analyst at Bloomberg Economics, said that commodity prices will dominate the inflation outlook in the near term, and if oil prices stay above $100 per barrel over the long run, the average overall inflation rate this year may approach 3%.

The energy shock caused by the Middle East fighting has led markets to worry that the 2022 inflation crisis could return. Back then, the euro area inflation rate at one point exceeded 10%. The European Central Bank faced criticism for moving too slowly in its response.

ECB under pressure; inflation prospects depend heavily on how the conflict unfolds

In response to inflation once again picking up, the European Central Bank has clearly adjusted its communication strategy this time. Lagarde has made it clear that she will not “freeze up” from hesitation in the face of the shock to the Iran conflict, emphasizing that she is ready to take action at any meeting.

The ECB’s Governing Council member and Belgium’s central bank governor Vens also previously said that if the fighting is not over before June, the likelihood of a rate hike would be high. Analysts point out that the subsequent path for inflation in Germany and even across the euro area depends largely on how the Middle East situation evolves and its ongoing impact on energy markets.

Martin Ademmer, an analyst at Bloomberg Economics, emphasized that the oil price trend is the key variable in determining whether inflation can remain persistently high. If the geopolitical conflict eases in the short term and energy prices fall, inflation pressure may ease as well; conversely, if oil prices remain at high levels for the long run, the euro area’s inflation center of gravity will face a systemic risk of shifting upward, and the ECB’s policy room for maneuver will be further narrowed.