The European Union has warned that the inflation rate could exceed 3% this year if conflict in the Middle East keeps the price of Brent crude at around $100 a barrel and gas at high levels. As reported by Bloomberg, which cites sources close to the discussions between the bloc’s finance ministers, Valdis Dombrovskis has envisaged a scenario in which inflation in 2026 would be 0.7-1 percentage point higher than the 2.1% previously estimated. These projections are based on the assumption that European gas prices remain close to 75 euros per megawatt hour for the rest of the year.
Brake to growth and risk of stagflation
The impact of the energy crisis would hit the economic recovery hard. Dombrovskis told ministers that growth in 2026 could be 0.4 percentage points lower than the 1.4% pace expected last year. According to Bloomberg, the Commissioner warned that persistent attacks on energy infrastructure and shipping routes risk exposing the world economy to a stagflationary shock in the long term. In addition to energy costs, the negative effects of the conflict on financial markets, global trade and supply chains weigh heavily.
Infrastructures targeted and routes blocked
The outlook for the economy, which seemed to be improving slightly, is now overshadowed by the war in Iran. The conflict has caused damage to energy facilities in Saudi Arabia and Qatar, affecting oil and LNG production. Furthermore, as highlighted by the Bloomberg report, the transit of oil tankers and cargo through the strategic Strait of Hormuz is almost at a standstill. European gas currently trades around 50 euros, after touching 70 euros at the beginning of the week, while Brent remains above 90 dollars a barrel, reflecting the high tension in the area.
The countermeasures and moves of the ECB
To mitigate the effects of the shock, the International Energy Agency approved on Wednesday the release of 400 million barrels from emergency reserves, the largest operation ever. However, inflationary pressure could push the European Central Bank to intervene on interest rates. While no increases are expected at the March 19 meeting, Councilwoman Isabel Schnabel said the new projections will reflect the impact of the war.
