War-Induced Inflation Spike Looms Over Europe’s Economic Recovery

 

War-Induced Inflation Spike Looms Over Europe’s Economic Recovery

 

For months, the region has been encouraged by low inflation and better-than-expected economic growth. A disruption to energy supplies from the Middle East could knock it off course.

 

Eshe Nelson

By Eshe Nelson

Reporting from London

https://www.nytimes.com/2026/03/03/business/iran-oil-gas-europe-inflation-economy.html

March 3, 2026, 10:56 a.m. ET

 

The European economy’s recovery is at risk of being derailed by the escalating conflict in the Middle East, as energy prices soar and threaten a resurgence in inflation.

 

For months, Europe’s economy has been in “a good place,” according to the European Central Bank. Inflation was low, economic growth was better than expected despite President Trump’s tariffs, and interest rates were expected to remain stable. But the prospect of a protracted conflict pitting Iran and its proxies against the United States and Israel, with strikes and counter-strikes across the Gulf, threatens to disrupt crucial oil and gas supplies.

 

In European capitals, the situation has revived unwelcome memories of an energy crisis, not so long after the region overcame the destabilizing effects of the last supply crunch, which followed Russia’s full-scale invasion of Ukraine in 2022.

 

Among major economies, the effects will “hit hardest” in Europe “and the timing could not be worse,” Carsten Brzeski, an economist at ING, wrote in a note. “Now the region could face an energy shock on top of a trade shock.”

 

European natural gas prices have almost doubled in the past two days, after Qatar’s state-owned energy company halted production of liquefied natural gas following attacks on its facilities. The European Union imports a majority of its oil and gas, making it vulnerable to volatility in global prices.

 

Qatar produces about a fifth of the world’s supply of L.N.G. Though much of this fuel is exported to Asia, analysts warn that disruptions to these flows would force buyers in Europe to compete with their Asian counterparts for supplies of gas from other exporters, like the United States or Australia.

 

The European Union gets much of its natural gas via L.N.G. from the United States and via pipeline from Norway. Only around 5 percent comes directly from the Middle East.

 

“The obvious immediate pain point for Europe is the double whammy of higher oil prices but also higher natural gas prices,” said Angel Talavera, chief European economist at Oxford Economics.

 

The jump in natural gas prices has spurred comparisons to the turmoil after Russia’s 2022 invasion of Ukraine. Then, Europe rushed to reduce its considerable imports of Russian gas. Natural gas prices surged and Europe experienced a painful and prolonged increase in energy-driven inflation.

 

At its peak, the average rate of inflation exceeded 10 percent in the eurozone and 11 percent in Britain. Central banks reacted by raising interest rates rapidly, to 4 percent in the eurozone and 5.25 percent in Britain. Policymakers have since brought rates down, but investors are reassessing how much further they can cut.

 

Traders have significantly diminished their bets that the Bank of England would cut rates at a meeting later this month, and are adding to bets that higher gas prices could lead to the European Central Bank’s next move being a rate increase.

 

The yields on Britain’s government bonds have jumped sharply over the past two days, challenging a message from Rachel Reeves, the country’s top finance official, that the government’s economic plan was on track.

 

That plan was “even more important in a world that in the last few days has become yet more uncertain,” Ms. Reeves said in Parliament on Tuesday, as she delivered a biannual economic update.

 

Further unsettling markets, data published on Tuesday showed that inflation unexpectedly accelerated in the eurozone. Consumer prices rose 1.9 percent in February from a year earlier, but economists had expected the inflation rate to hold steady at 1.7 percent.

 

While gas prices are nowhere near the levels they reached in 2022, analysts warn that prices can surge quickly and remain elevated if supplies aren’t restarted quickly.

 

Europe’s natural gas storage levels are low. In Germany, the region’s largest gas consumer, storage levels have fallen to just 21 percent of capacity. The arrival of warmer spring weather will blunt the immediate impact. But if prices stay high it will be expensive for Europe to rebuild its gas stores in time for next winter.

 

Still, analysts said that the disruptions would need to last for more than a couple of weeks to have a significant effect on the European economy, which is more resilient than it was a few years ago. In this case, unlike after the Ukraine invasion, it is not trying to urgently switch its main energy supply from one country to another.

 

The European Union has played down the risk of higher energy prices, though officials will hold several meetings in coming days to discuss the energy market. The bloc has called meetings on Wednesday of its gas and oil coordination groups, which consist of energy experts. An E.U. task force on energy will meet Thursday; and on Friday, commissioners will discuss energy security and prices.

 

“We’re still at safe levels of storage, and we’re counting down to the end of the heating season, which takes place at the end of the month,” said Paula Pinho, a spokeswoman for the European Commission.

 

Jeanna Smialek contributed reporting from Brussels.

 

Eshe Nelson is a Times reporter based in London, covering economics and business news.