Iran War Pushes Eurozone Inflation to 3.8 Percent

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The war in the Persian Gulf is now hitting supermarket checkouts and gas pumps. Inflation in the euro area rose to 3.8 percent in September, up from 3.2 percent in August, according to a flash estimate just released by the E.U. statistics office Eurostat. It is the highest reading in three years; inflation was last this high in the fall of 2023. Economists had on average expected a slightly smaller increase. The rate is now almost double the European Central Bank’s 2 percent target.

Energy Is the Main Driver

Energy accounts for nearly half of the increase. Energy prices were 18.8 percent higher in September than a year earlier, compared with 14.3 percent in August. The reason is the war between the United States and Iran, which has been pushing up oil prices for months. Before the war, about a fifth of the world’s oil supply passed through the Strait of Hormuz, where shipping has since been severely restricted. In September, Brent crude rose more than 14 percent to around $103 (about 88 euros) a barrel. Most recently, President Trump rejected a proposal from Tehran to reopen the strait, sending prices higher still.

“It is above all the massive increases in energy prices that drove inflation to its highest level since the fall of 2023,” said Jörg Krämer, chief economist at Commerzbank, as the German newspaper Rhein-Zeitung reported. Food prices also climbed: Unprocessed food rose 4.0 percent, after 2.7 percent the month before. Services prices increased 3.2 percent.

The differences between eurozone countries are large:

• Lithuania: 6.1 percent, the highest rate in the eurozone
• Spain: 5.0 percent
• Italy: 4.1 percent, up from 3.2 percent in August
• France: 3.4 percent
• Germany: 3.3 percent

In Austria, inflation rose to 3.6 percent from 3.2 percent in August, Statistics Austria said in its flash estimate. Energy cost 14.5 percent more than a year earlier. The increase of 0.4 percentage points was entirely due to higher prices for fuel and heating oil, said Manuela Lenk, the agency’s director general.

The E.C.B. Is Under Pressure

For monetary policy, the situation is tricky. The E.C.B. has already raised its deposit rate twice this year, most recently in September by 0.25 percentage points to 2.5 percent. Trending Topics reported on the jump in inflation in August ahead of that move. Many economists now expect another increase. “An E.C.B. rate hike in December is as good as set in stone,” said Thomas Gitzel, chief economist at VP Bank. A move as early as October is seen as possible if energy prices keep rising.

There are also arguments against tightening quickly. Core inflation, which excludes energy, food, alcohol and tobacco, rose only slightly, from 2.4 to 2.5 percent. That suggests the energy shock has so far barely spilled over into other prices. The E.C.B. also sees no second-round effects in wages yet: Wages “do not show a material response to the energy shock at this stage,” E.C.B. President Christine Lagarde said after the September rate decision. Higher interest rates also do nothing to increase the supply of oil, but they do slow an economy that contracted in the first quarter.

What It Means for Households and Businesses

For consumers, high inflation means above all that filling up the car and heating the home are getting much more expensive, just as the heating season begins. Several governments are trying to counter this. Germany is cutting its fuel tax by about 17 cents per liter from October through the end of the year. Overall, however, government support across the eurozone has so far been modest, at about 0.1 percent of economic output.

Rising interest rates also make loans more expensive. That affects homeowners with variable-rate mortgages as well as companies that want to invest. Start-ups face a tougher environment, too, because investors find safe assets more attractive again when rates are higher. On top of that, borrowing costs for governments are rising: Yields on French government bonds are at their highest level in decades.

What happens next depends above all on the price of oil, and therefore on the course of the Iran war. A reopening of the Strait of Hormuz would quickly ease energy prices, while further escalation would push inflation even higher.