Iran War Triggers Oil Shock, Raising Eurozone Inflation and Stalling Growth as ECB Holds Rates

The conflict that began on 28 February when Iran blocked the Strait of Hormuz has pushed Brent crude above $120 per barrel, later touching $126 per barrel. The surge in oil prices has been transmitted to European fuel stations and jet fuel, lifting the euro-area’s annual inflation rate to 3 % in April, up from 2.6 % in March. Energy-price inflation alone rose 10.9 % year-on-year, more than double the 5.1 % increase recorded in March.

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The Strait of Hormuz carries roughly 20 % of global oil shipments. Iran’s closure has curtailed supply, creating a global energy crunch that directly fuels the eurozone’s price pressures. Prior to the war, oil traded near $73 per barrel; the blockade has more than halved that price level, reshaping import costs for European economies.

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• Overall inflation (April): 3 % YoY (vs. 2.6 % in March).

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• Core inflation (excluding food & energy): 2.2 % in April, down from 2.3 % in March.

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• Energy-price component: 10.9 % YoY increase in April.

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• Quarterly GDP growth (Q1 2026): 0.1 % expansion, unchanged from the previous quarter’s 0.2 % rise.

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• Seasonally adjusted YoY GDP: 0.8 % increase, down from 1.3 % in the prior quarter.

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The European Central Bank kept its benchmark rate at 2 %—the level maintained since June 2025—despite inflation running above its target. President Christine Lagarde said the Governing Council debated a rate rise but will “revisit the bank’s stance with new information at the next meeting on June 11.” Lagarde also rejected the label “stagflation,” arguing that current inflation is not entrenched and that the labor market remains strong.

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Economists warn that the combination of rising prices and stagnant output could evolve into stagflation, stressing the risk of “second-round effects” such as wage-price spirals. Morgan Stanley analysts noted that the data “align with our long-held view that the ECB will remain on hold in April and will want to keep all options on the table for the next meetings.” Their assessment underscores uncertainty about whether the ECB will need to tighten policy later.

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While several analysts describe the situation as a potential stagflation scenario, Lagarde explicitly dismissed the term, creating a divergence between market expectations and the ECB’s official narrative. No consensus exists on whether inflationary pressures will become self-reinforcing.

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• “We don’t apply that flashy term, ‘stagflation,’ to the circumstances that we have.” — Christine Lagarde, President, European Central Bank

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• “This aligns with our long-held view that the ECB will remain on hold in April and will want to keep all options on the table for the next meetings," Morgan Stanley analysts noted in emailed analysis Thursday.” — Morgan Stanley analysts

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The ECB’s next policy meeting on June 11 will assess whether inflationary spikes are transitory. Meanwhile, the Bank of Japan, the U.S. Federal Reserve, and the Bank of England have also left rates unchanged, indicating a broader global pause in monetary tightening while the war-driven energy shock persists.

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