One month ago, energy was dragging eurozone inflation lower. In February, energy prices were falling at a 3.1% annual rate, and headline inflation sat comfortably at 1.9% — just below the ECB’s 2% target.
Then came the Iran war.
Eurozone annual inflation surged to 2.5% in March, up sharply from 1.9% in February, according to a flash estimate published by Eurostat on Tuesday.
The reading came in just below the market consensus of 2.6%, but the underlying momentum was unmistakable: on a month-over-month basis, consumer prices rose 1.2%, the steepest monthly increase since October 2022.
The key question now is how quickly an energy shock can reshape the ECB’s entire interest-rate playbook.
Energy shock drives fastest monthly inflation rise since 2022
The driver was unambiguous. After contracting by 3.1% in February, energy inflation surged to 4.9% year-on-year — a turnaround of nearly 8 percentage points in a single month — as the war in Iran and the near-total closure of the Strait of Hormuz sent oil and gas prices spiralling.
Brent crude has risen above $110 per barrel, while European natural gas prices have climbed roughly 80% year-to-date.
Yet, despite the strong headline increase, core inflation — which strips out energy, food, alcohol and tobacco — actually declined to 2.3% from 2.4%, undershooting the consensus expectation of 2.4%.
Services inflation also eased slightly, from 3.4% to 3.2%. Non-energy industrial goods fell to 0.5% from 0.7%.
This is a critical distinction. The March inflation reading is, for now, a textbook first-round energy shock.
Whether it stays that way will determine the ECB’s next move.
Which countries are feeling the inflation heat?
The inflationary impact is far from uniform across the bloc.
Croatia leads with 4.7%, followed by Lithuania at 4.5%, Ireland at 3.6%, and Spain and Greece both at 3.3%. Germany recorded 2.8%, a jump of 0.8 percentage points from February.
At the other end, Italy is at 1.5%, flat on the previous month, while France came in at 1.9% — nearly a full percentage point below the eurozone average.
This divergence reflects deep structural differences in how energy prices reach European consumers.
Goldman Sachs economists Niklas Garnadt and Giovanni Pierdomenico developed a model mapping the transmission of the energy shock to consumer prices, showing pass-through is strongest in Italy, fastest in Spain, more gradual in Germany and weakest in France.
Italy remains heavily reliant on natural gas for electricity generation, while Spain’s flexible short-term tariffs mean wholesale price spikes hit household bills almost immediately
In France, widespread nuclear generation and regulated electricity contracts help cushion households, limiting the spillover from commodity markets into consumer prices.
How will Frankfurt respond to the inflation spike?
The inflation rebound has reignited debate over whether the ECB will resume rate hikes in the coming months.
Market-based expectations suggest tightening is increasingly likely later this year, but near-term action remains uncertain.
ECB President Christine Lagarde set out the central bank’s thinking at the ECB Watchers Conference last week.
She acknowledged that even a temporary inflation overshoot might warrant action, warning that leaving it unaddressed could pose a credibility risk.
But she also stressed that the ECB would wait for sufficient evidence before acting: the bank’s stance, she said, would be guided by data, not forecasts.
So will the ECB hike in April?
This is where the debate becomes genuinely contested.
ING’s Global Head of Macro Carsten Brzeski argues that markets may be getting ahead of themselves. Last week, he cautioned that “learning from that episode does not mean a rate hike is imminent.”
He identified three potential triggers that could force the ECB’s hand: headline inflation above 4%, core above 3%, or a sustained rise in survey-based inflation expectations. None of those thresholds has been breached yet.
“As long as the energy price shock remains broadly contained… it’s far from certain that the ECB will react at all,” Brzenski added.
But one threshold may be closer than it appears. Consumer inflation expectations in the eurozone surged to 43.4 in March from 25.8 in February — the sharpest monthly jump in years — according to European Commission data. If that trajectory continues, Brzeski’s “credibility” trigger comes into play fast.
Others, however, take a more proactive view. Analysts at ABN AMRO, a Dutch lender, see the ECB hiking twice over the coming months, framing them as “insurance hikes” designed to anchor inflation expectations at a moment when wage growth has only just returned to levels consistent with the 2% target.
On prediction markets, traders appear even more hawkish than the outlooks put forward by most investment banks for the ECB.
As of Tuesday, the probability of an ECB rate hike at the April meeting stands at 36.2%, with no-hike at 63.8% — live, but not the base case.
For June, however, a 25-basis-point increase is priced at 76%.
The market’s conviction on full-year tightening is striking: an ECB rate hike somewhere in 2026 is now priced at 84% probability.
On inflation itself, prediction markets on Polymarket price a 61% probability that Eurozone annual inflation will end 2026 above 3.1%, and a 24% chance it falls in the 2.8–3.0% range.
Combined, that puts the probability of inflation above 2.8% by December at roughly 85%.
Is this 2022 all over again?
Most economists say no — but with important caveats.
The starting point is different: gas prices have risen around 80% year-to-date, yet average wholesale electricity prices for the five largest Eurozone economies are still below their January levels, largely because renewables and nuclear are displacing gas at the margin.
BNP Paribas economists Stéphane Colliac and Guillaume Derrien highlighted that core inflation is expected to remain stable through the second quarter, with surveys suggesting limited pass-through to selling prices in the near term.
Their base case assumes Brent remains above $100 per barrel through the end of second quarter, with a prolonged Hormuz blockade but no catastrophic infrastructure damage.
In that scenario, they expect the ECB to begin tightening in June, with cumulative hikes of 75 basis points by autumn.
Bank of America’s economist Ruben Segura-Cayuela highlights what he calls the “fresh memory” argument: because households and firms still remember 2022 vividly, their behavioural response to this new shock may be faster and more amplified than historical models would predict — both in inflation dynamics and in the precautionary saving that could depress consumption.
The labour market, he argues, is entering this shock in a considerably weaker state than it was four years ago.
According to Bank of America, an April rate hike is “possible, but less certain,” stressing that policymakers will likely wait for clearer evidence on how the energy shock feeds into inflation.
Instead, BofA sees a higher probability of action later in the year, with “a couple of hikes this summer (in June and July)” under a persistent energy shock scenario.
The road ahead
The ECB now faces the same dilemma that haunted it in 2022: tighten policy to anchor inflation expectations, or hold back as the economy weakens beneath the shock.
March’s data confirms that price pressures are resurfacing — but they have not yet broadened decisively beyond energy.
Core inflation actually fell, and services eased, giving the doves on the Governing Council just enough cover to argue for patience at the April meeting.
But patience has a shelf life. If the Strait of Hormuz remains largely closed, oil stays above $100, and core inflation begins drifting higher in the months ahead, the ECB will have little choice but to act.
The question Frankfurt must answer is not whether it is willing to hike — Lagarde has already made that clear.
It is whether it can afford to wait until the damage is visible in the data, or whether the ghosts of 2022 will force it to move before the evidence is fully in.
