FRANKFURT, Germany — The ongoing conflict between Iran and coalition forces has sent global oil markets into turmoil, creating a toxic economic mix for the 21-nation eurozone that pushes the bloc closer to stagflation, new official data shows.
On Thursday, the European Union’s statistical body Eurostat released figures showing annual inflation across the euro currency area climbed to 3.0% in April, up from 2.6% recorded in March. The sharp uptick was almost entirely driven by a 10.9% month-over-month jump in energy prices, triggered by massive supply disruptions stemming from the Iran war. Since the outbreak of hostilities on February 28, international benchmark crude prices have surged from around $73 per barrel to above $120 a barrel, as Iran’s blockade of the Strait of Hormuz cut off a critical global oil chokepoint. Approximately 20% of the world’s total oil trade passes through the waterway, connecting Persian Gulf producing nations to global markets. The price shock has already hit consumers directly, with higher costs showing up immediately at gasoline pumps and in jet fuel prices for air travel.
Alongside the unwelcome inflation surge, the eurozone also delivered underwhelming growth figures for the first quarter of 2025. The bloc recorded only a marginal 0.1% increase in output compared to the final quarter of 2024, a result that fell far short of analyst expectations.
This dual pressure of stagnant growth and above-target inflation has put the European Central Bank (ECB) in an extremely difficult policy position. The ECB has a long-standing inflation target of 2%, and conventional economic policy calls for raising benchmark interest rates to cool overheating prices. However, hiking borrowing costs would further dampen already weak economic growth, creating a risk of a full-blown recession.
Policymakers widely expect the ECB to leave its key benchmark interest rate unchanged at its Thursday meeting, a position that aligns with other major global central banks that have also hit a policy pause amid the uncertainty. The U.S. Federal Reserve and the Bank of Japan both held interest rates steady at their respective monetary policy meetings earlier this week, and the Bank of England is also projected to keep rates unchanged as it assesses the ongoing fallout from the Iran war. The ECB has kept its main policy rate fixed at 2% since June 2025.
The dilemma for central bankers hinges on whether the current inflation surge will prove temporary. If price pressures are transitory, moving to hike rates now would unnecessarily harm growth, as interest rate changes take months to filter through to the broader economy. But if policymakers wait too long, higher energy costs could push up prices for food, manufactured goods and prompt demands for higher wages, embedding persistent inflation into the economy. Once inflation becomes entrenched, central banks are forced to implement even more aggressive, economically painful rate hikes to bring prices back under control.
Right now, major central banks around the world remain stuck in a holding pattern, cautiously monitoring the inflation shock as it works its way through the global economy, with no room to either cut or raise rates in the current uncertain environment.