Energy shock ignites inflation! France's CPI in March rose to a new high since August 2024, and the European Central Bank is now entering the countdown to raise interest rates.

The impact of the Middle East war causing energy costs to soar has accelerated France's inflation rate to its highest level since August 2024, increasing pressure on the European Central Bank to tighten monetary policy. Data released by the French National Institute of Statistics and Economic Studies (Insee) on Tuesday showed that France's consumer price index (CPI) rose by 1.9% year-on-year in March, in line with market expectations and higher than February's 1.1%. After more than a year of decline, energy prices soared by 7.3% in March. However, there is hardly any sign at the moment that this pressure is rapidly transmitting to other areas - service sector inflation only increased slightly to 1.7%, while producer prices fell by 0.6% year-on-year. With the military conflict between the United States, Israel, and Iran entering its fifth week, and US President Trump threatening to destroy Iran's energy infrastructure if a deal to end the war is not reached, inflation rates around the world are rising, and expectations of further price increases are also on the rise. Preliminary data released by Germany on Monday showed that the CPI rose by 2.7% year-on-year in March, higher than February's 1.9%. Preliminary data released by Spain last Friday showed that the CPI rose by 3.3% year-on-year in March, higher than February's 2.3%. Eurozone inflation rate for March will be announced tonight. The market currently expects the year-on-year increase in the Eurozone CPI to rise to 2.6%, the highest level since July 2024. Middle East war leads to soaring inflation expectations in France At the same time, another survey by Insee last week showed that inflation expectations for French households have reached their highest level since 2022. A survey by the European Commission also shows similar views across the continent. As consumers and businesses start to feel the pressure of rising gasoline prices, the French government is facing pressure to provide assistance. Currently, the government has only taken limited and targeted measures to support industries most affected by the risk. Due to the dominance of nuclear power in France's energy structure, the country is less affected by the rise in oil prices compared to many of its European counterparts. Additionally, before this shock occurred, France had relatively low inflation rates and stable economic growth. However, another report released by Insee on Tuesday showed that consumer spending in February fell by 1.4% compared to the previous month, much larger than the market's expected decline of 0.3%. European Central Bank entering countdown to rate hike Currently, European Central Bank officials are weighing whether to raise borrowing costs to prevent the surge in energy prices from evolving into broader inflationary pressures. As inflation rises, investors expect the ECB to raise rates at least twice by the end of this year, with action possibly taken as soon as the policy meeting in April. The ECB's latest assessment has raised the inflation forecast for 2026 from 1.9% to 2.6%. According to sources familiar with the matter, if the aftermath of the Middle East war results in inflation far exceeding the 2% medium-term target, policymakers will be prepared to raise rates at the April meeting. The source said that while no final decision has been made, if signs of a second round of inflation effects appear before the April meeting (i.e. when inflation shifts from "external input" to "internal self-reinforcing loop"), the ECB may have to raise rates in April rather than wait until a later date like June. ECB President Christine Lagarde has promised to take prompt and decisive action if necessary. However, some ECB officials have also stated that they will not rush to raise rates. French central bank governor Franois Villeroy de Galhau stated on Monday that while the ECB is prepared to take action, it is "too early to debate when to act specifically." The ECB Governing Council member noted that the Middle East war could trigger negative supply shocks, leading to slower economic growth and faster consumer price increases. He added that the latest news about the conflict "did not bring favorable signals." In an interview on Monday, he said, "The ECB cannot control oil prices, but we have the ability and the duty to anchor inflation expectations of households and businesses at the 2% medium-term target," "If needed, we are ready to take action in that direction." Another ECB Governing Council member and head of the Belgian central bank, Pierre Wunsch, said that if the Middle East conflict is not resolved by June, the ECB may have to take action. However, he also urged markets to be patient so that officials can fully assess the extent of the conflict's impact on the economy. He noted in an interview that while policymakers are prepared to tighten monetary policy, they will not rush to implement measures that could be seen as an overreaction. ECB Governing Council member and head of the German central bank Joachim Nagel said last week that if concerns about a surge in Eurozone inflation due to the Middle East conflict arise, the ECB will have the "option" to raise rates at the next monetary policy meeting. Nagel pointed out that by the meeting on April 29-30, he and his colleagues will have sufficient information about the progress of the war and its economic impact to decide whether rate hikes are necessary. When asked about the possibility of a rate hike in April, he said, "It is indeed an option, but it is just one of the options." Overall, there is still some technical disagreement within the ECB regarding the timing of future rate hikes. While some hawkish officials support taking decisive action at the meeting on April 29-30, others are more cautious, believing that due to the lack of the latest official quarterly forecast data at the April meeting, a decision may need to wait until June for more comprehensive economic indicators to support the decision. Meanwhile, JPMorgan, Morgan Stanley, and Barclays Bank predict that the ECB will raise rates in 2026, a stark contrast to their previous expectations of unchanged rates. Barclays Bank and JPMorgan expect the ECB to raise rates at the policy meeting in April, followed by further rate hikes in June and July. Morgan Stanley expects the ECB to raise rates by 25 basis points in June and September.