Germany inflation jumps to 2.8% as energy costs surge

Germany’s inflation accelerated sharply in March, driven by a surge in energy costs linked to the ongoing Iran war, reinforcing expectations that the European Central Bank may need to raise interest rates.

Consumer prices rose 2.8% year-on-year, up from 2% in February, Germany’s statistics office reported on Monday, March 30. The figure marks the highest level in more than a year and aligns with the median estimate in a Bloomberg survey.

Energy prices jumped 7.2%, recording their first increase since December 2023. Meanwhile, core inflation — which excludes volatile items such as energy and food — held steady at 2.5%.

Now in its fifth week, the conflict in the Middle East is feeding through into European economies via higher oil and gas prices, shaping both inflation data and consumer expectations. Christine Lagarde has pledged that the ECB will act “decisively and swiftly” if necessary, though officials have indicated they will proceed cautiously as they assess the broader economic impact.

Financial markets are anticipating a relatively rapid policy response, with traders increasingly expecting an interest-rate hike as soon as the ECB’s April meeting. Markets are currently pricing in as many as three rate increases over the course of the year.

Germany’s data follows a rise in inflation in Spain, where consumer prices climbed to 3.3%, although the increase came in below analysts’ forecasts. Inflation figures from France and Italy are due on Tuesday, alongside euro-area data that is expected to reach 2.6% — the highest level since July 2024.

There are also indications within Germany that businesses are bracing for prolonged energy pressures. A survey published earlier Monday by the Ifo Institute showed a growing number of companies planning to raise prices. Separately, a European Commission poll found that consumer inflation expectations have risen to their highest level since 2022.

Policymakers have warned about the risks of entrenched inflation expectations. Francois Villeroy de Galhau said central banks have a “duty” to prevent such expectations from becoming embedded, while Yannis Stournaras cautioned that a prolonged conflict could lead to stagflation and push the economy away from the ECB’s baseline scenario, which assumes inflation will return to the 2% target over the medium term.

The ECB has previously faced criticism for reacting too slowly to the energy shock triggered by Russia’s invasion of Ukraine four years ago, when inflation surged above 10% and forced policymakers into aggressive rate hikes.

While the current situation again stems from rising energy costs, ECB officials emphasize that the euro area is better positioned this time, citing weaker demand, a resilient labor market, and more neutral monetary policy settings.

By Tamilla Hasanova