Eurozone Inflation and the ECB in 2026 — The Energy Shock and Interest Rates

How has eurozone inflation moved since the Iran war began?

Before the war, energy was pulling inflation down. In February, euro area energy prices were 3.1% lower than a year earlier ^[1]. Headline inflation was 1.9%, just under the European Central Bank's (ECB) 2% target ^[1]. The flash estimate for March showed inflation jumping to 2.5% ^[1]. Prices rose 1.2% in a single month, the steepest monthly rise since October 2022 ^[1]. Eurostat later revised March to 2.6%, with energy up 5.1% ^[5].

Inflation, measured by the harmonised index of consumer prices (HICP), then rose to 3.0% in April and 3.2% in May ^[6]. Energy inflation reached 10.8% in April and 10.9% in May ^[2]. Headline inflation eased to 2.8% in June, as energy inflation slowed to 8.5% ^[4,6]. It then climbed to 2.9% in July, 3.2% in August and 3.8% in September ^[6]. Eurostat confirmed the September figure on 16 October ^[7].

Energy explains most of the rise. It contributed 1.71 percentage points of September's 3.8%, against 1.52 points from services, Eurostat data show ^[6]. The ECB says inflation excluding energy rose to 2.3% in September from 2.1% in August ^[8]. Services inflation was 3.2% and goods inflation 1.1% ^[8]. ECB President Christine Lagarde said "underlying inflation has remained broadly stable so far" ^[8].

Why does inflation differ so much between countries?

The spread across Europe is wide. In September annual inflation ranged from 1.0% in Sweden to 6.5% in Romania, and rose in 23 of the 27 EU member states ^[7]. Among euro area countries, Lithuania (6.1%), Bulgaria (5.6%) and Luxembourg (5.2%) were highest, while Germany was at 3.3% and France at 3.4% ^[6].

Energy markets reach households in different ways. In March, Goldman Sachs economists cited by Euronews found pass-through strongest in Italy and fastest in Spain ^[1]. It was more gradual in Germany and weakest in France ^[1]. They pointed to Italy's reliance on gas for power, Spain's flexible short-term tariffs and France's nuclear generation and regulated contracts ^[1]. In March, Spain was at 3.3% while Italy was at 1.5% and France at 1.9% ^[1].

National first estimates for October, published on 30 October, show those gaps shifting. Italy's harmonised rate rose to 5.6%, according to Istat data reported by Euronews ^[14]. Energy prices were up 31.4% on the year and regulated energy tariffs up 59.5% ^[14]. France's harmonised rate reached 3.8%, with energy up 24.1% ^[14]. Spain's eased to 4.9% from 5.0% ^[17]. In Germany, national consumer price inflation fell to 2.8% from 3.3% ^[15].

How have fuel-tax cuts affected inflation?

Fuel-tax policy now differs sharply between countries, and it shows in the data. Germany cut taxes on petrol and diesel by 17 cents a litre from 1 October to the end of the year, Euronews reported ^[18]. The cut costs €2.5bn ^[18]. German inflation then came in below forecasts. Analysts polled by Reuters had expected 3.1% on the harmonised measure; the national index showed 2.8% ^[16]. Energy inflation in Germany slowed to 12.2% from 14.9% ^[16].

Commerzbank's chief economist Jörg Krämer said the drop below 3% was "primarily due" to the rebate ^[15]. He added that "around the turn of the year, inflation will likely rise above 3 percent again" ^[15]. Pantheon Macroeconomics expects German energy inflation to snap back in January and February if fuel duties rise again ^[14].

Elsewhere the picture is mixed. Spain's statistics office INE said lower prices for vehicle fuels pulled its October rate down ^[17]. Spain had extended petrol and diesel tax cuts first introduced in March as part of a €5bn package ^[18]. Italy let its diesel excise cut expire on 5 October, when it was worth 6.1 cents a litre ^[19]. France chose a €450m package of targeted aid instead of a broad tax cut ^[18].

The ECB's view is that such measures should be "temporary, targeted and tailored" ^[8]. Its September projections include energy support worth 0.1% of gross domestic product (GDP), mostly lower indirect taxes and higher subsidies ^[12]. The staff expect that support to be reversed in 2027 ^[12].

Why did the ECB raise rates and then pause?

The ECB raised its three key rates by 25 basis points on 11 June, taking the deposit rate to 2.25% ^[10]. It raised them again on 10 September, saying the Middle East conflict "continues to generate inflation pressures" ^[11]. It expected inflation to stay well above target for an extended period ^[11]. On 29 October it held the deposit rate at 2.50%, the main refinancing rate at 2.65% and the marginal lending rate at 2.90% ^[9].

Lagarde said the Governing Council "debated whether a hike was appropriate" in October ^[8]. It decided unanimously that it was "well positioned enough at this stage to hold" ^[8]. She cited rising uncertainty and stable underlying inflation ^[8]. She also noted that average ten-year sovereign yields had risen by around 35 basis points since the cut-off for the September projections ^[8].

What do the ECB staff scenarios show?

The September staff baseline puts inflation at 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028 ^[12]. It assumed oil at an average of $89.5 a barrel and gas at €51.0 per megawatt hour in 2026 ^[12]. Market data were cut off on 19 August ^[12]. In that baseline, inflation peaks at 3.6% in the fourth quarter of 2026 and energy inflation at almost 15% ^[12].

The ECB says energy prices have since risen beyond that baseline path ^[8]. September's actual figures, 3.8% headline and 18.9% for energy, were already above both projected peaks ^[8,12].

Staff also published three scenarios, based on market-implied ranges for oil and gas prices ^[12]:

• Milder: energy prices normalise faster; inflation falls to 1.9% in 2027 ^[12].
• Adverse: a sharper, more persistent rise; inflation of 3.2% in 2027 ^[12].
• Severe: a stronger shock with larger wage and price effects; inflation peaks at 5.4% in 2027, when growth slows to 0.4% ^[12].

The account of the September meeting shows a divided reading. Most members judged the baseline more plausible, but the view was also held that the adverse scenario was more likely ^[13]. Some argued the shock was politically driven and "could disappear as quickly as it had appeared" ^[13]. Others said the "second wave" of the crisis was unfolding ^[13]. Members flagged gas prices as a risk if an unusually cold winter coincides with low storage ^[13].

What to watch before the December meeting

The ECB next decides on rates on 17 December ^[3]. Lagarde said staff "will most likely produce scenarios again in December" and that the bank is "not pre-committing to a particular rate path" ^[8].

• Economists' expectations. In a Reuters poll taken on 5–8 October, 64 of 73 economists expected another hike in December ^[20]. Of 70 who gave a view, 40 saw the deposit rate peaking at 2.75% ^[20].
• October euro area flash. Eurostat's estimate is due next week, Euronews reports. Pantheon has raised its forecast to 4%, while BofA expected 3.7% ^[14].
• Energy prices. Morgan Stanley's Jens Eisenschmidt told Reuters his forecast assumes oil prices do not rise further ^[20].
• Fuel taxes. Germany's cut ends with the year, so January data may show energy inflation rising again ^[14,18].
• Leadership. Euronews reports that Lagarde has announced she will step down in February ^[14].

Alupetra follows European energy prices daily; our TTF and diesel price pages track the inputs that drive these inflation figures.