Inflation increases to 2.5% in Europe as Iran war boosts energy prices
FRANKFURT, Germany (AP) — Europe's inflation rate rose to 2.5% in March as the Iran war sent fuel prices sharply higher, official figures showed Tuesday. And that is leading analysts to pencil in interest rate increases by the European Central Bank later this year.
The annual rate for the 21 European Union member countries using the euro currency compared to 1.9% for February before the war started and blocked supplies of oil and gas from the Persian Gulf.
Energy prices increased 4.9% percent in March compared to a 3.1% decline in February, Eurostat figures showed.
The war's impact on prices has already hit home at the vast Trionfale indoor market in Rome just north of the Vatican, where vegetable stand owner Anna Caruso said the higher cost of fuel was being reflected in prices for zucchini, eggplant and fruit.
“If the price of fuel increases, those who transport will increase the general price,” she said. “With many items, they say, I can't afford this ... and shift toward the cheaper items.”
Some prices were higher due to some produce not being in season, said stand owner Paola Ianzi, “but the increase is also partially due to the war because diesel and fuel increased and those who transport fruit and vegetables need to compensate that."
Food price inflation came in at a relatively moderate 2.4% while services, a broad category ranging from medical care to haircuts, rose 3.2%.
European Central Bank head Christine Lagarde has said that businesses may be quicker to raise prices during this outbreak of inflation due to bitter memories of the last episode of higher prices in 2022, when inflation rose to double digits. Russia cut off most supplies of natural gas to Europe and oil prices rose, sending energy costs through the roof.
Iran has blocked most of the tanker traffic through the Strait of Hormuz, the waterway through which some 20% of the world's oil and gas typically passes. That is raising the prospect of sharply tighter markets for fuel in the coming weeks and months.
The expected further rise in inflation beyond the ECB's 2% target is leading analysts to predict the ECB will raise interest rates in the coming months to keep inflation from becoming ingrained in the economy through expectations of higher wages and prices for other goods. “We expect the ECB to raise rates already at the April and June governing council meetings... in order to pre-empt any de-anchoring of inflation expectations,” said Bill Diviney, head of macro research at ABM AMRO bank. Analysts at Oxford Economics also expect two interest rate hikes this year.
The ECB left its key rate unchanged at 2% at its last meeting on March 19. Higher interest rates are the chief central bank tool against inflation.
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Associated Press journalist Trisha Thomas contributed from Rome.
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