Soaring oil prices resulting from the Iran war have pushed inflation higher in Europe, reaching 3.0% in April, while economic growth continues to underperform. This troubling combination poses challenges for consumers and policymakers at the European Central Bank (ECB).
Inflation and Energy Prices
Annual inflation in the 21 countries using the euro currency rose to 3.0% from 2.6% in March, according to Eurostat. The increase was driven by a 10.9% surge in energy prices. Crude oil is now trading above $120 per barrel, up from around $73 before the outbreak of the war on February 28.
The Iran war has dealt a massive shock to the global economy because Iran has blocked the Strait of Hormuz, a waterway through which approximately 20% of the world's oil previously passed. This disruption has quickly translated into higher prices at gas stations and for jet fuel.
Stagflation Concerns
Meanwhile, eurozone growth for the first quarter of the year disappointed, with a marginal increase of just 0.1% compared to the previous quarter. The combination of slow growth and high inflation, known as stagflation, threatens to become a significant headache for the ECB.
Policymakers are expected to leave the benchmark interest rate unchanged at 2% on Thursday, despite inflation clearly exceeding the bank's target of 2%. The usual remedy for inflation—raising interest rates—could further slow growth by increasing credit costs. If inflation is deemed temporary, central banks often look past it, as rate changes take months to affect the economy. However, waiting too long could allow inflation to become entrenched through higher food and manufactured goods prices and wage demands, making it harder to control.
Global Central Bank Response
The Bank of Japan and the U.S. Federal Reserve both left rates unchanged this week, and the Bank of England was also expected to hold steady. Central banks worldwide are currently in a holding pattern, warily watching the inflation wave and refraining from both rate hikes and cuts. The ECB's benchmark rate has remained at 2% since June 2025.
This situation leaves policymakers with a difficult balancing act: addressing inflation without stifling already weak economic growth.
