Iran conflict drives Eurozone inflation to 3.2 percent

Inflation in the Eurozone accelerated in May, reaching 3.2% year-on-year, primarily fueled by a surge in energy prices linked to the conflict in Iran. This figure, based on an initial estimate from the statistical office Eurostat, surpasses the 3.0% rate recorded in April and significantly exceeds the European Central Bank's (ECB) medium-term target of 2%.

The rising inflation puts the ECB under pressure to respond. Financial markets widely expect the central bank to increase its key interest rates for the first time this year at its upcoming decision on June 11. The current deposit rate stands at 2.0%. ECB President Christine Lagarde has recently indicated the bank's readiness to act if necessary.

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Inflation is likely to remain above 3 percent for many months, unless the Strait of Hormuz is unexpectedly opened quickly.

Economists predict that inflation will likely remain above 3% for many months unless the situation in the Strait of Hormuz improves. Surveys also suggest that an increasing number of companies are passing on higher energy costs to consumers, contributing to sustained inflationary pressures. "The ECB has no choice but to raise its key interest rates at next week's meeting. It will likely increase them again after the summer break," commented Jörg Krämer, chief economist at Commerzbank.

The conflict in Iran has caused energy prices to skyrocket, with a 10.9% year-on-year increase in May. Prices for services rose by 3.5%, and food and non-alcoholic beverages saw a 2.0% increase. While higher ECB interest rates could help curb demand and dampen inflation by making credit more expensive for consumers and businesses, they also pose a risk to the Eurozone's fragile economy, which is already struggling with the repercussions of the Iran conflict.

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The ECB has no choice but to raise its key interest rates at next week's meeting. It will likely increase them again after the summer break.