ECB warns Middle East conflict could drive lasting inflation in euro area

The European Central Bank is warning that the war in the Middle East could feed through to euro area prices for a prolonged period, with chief economist Philip Lane saying the energy shock from the Iran war will have a lasting and profound impact on inflation, according to Asharq Al-Awsat. ECB Board Member Álvaro Santos Pereira separately said the conflict will significantly affect price developments, underscoring concern inside the central bank that the shock could push inflation higher and complicate policy decisions.

Pereira said the war has not yet had a “dramatic” effect on the euro area economy, but he cautioned that the impact could widen depending on how long the conflict lasts and how far it spreads, according to Econostream reporting. He described the situation as a negative supply shock, which typically means lower growth and higher inflation, and said the ECB must watch closely for signs that prices and inflation expectations are moving higher.

The comments matter because the euro area has spent much of the past few years trying to bring inflation back under control after the post-pandemic surge and the energy shock that followed Russia’s invasion of Ukraine. Another sustained rise in energy costs would risk slowing consumer spending, squeezing business margins, and making it harder for the ECB to judge when inflationary pressure is temporary and when it is becoming embedded.

According to Pereira, the ECB’s current view of the outlook sits somewhere between its baseline and adverse scenarios, suggesting officials see meaningful risk but not yet a full-blown economic shock. He said the central bank would need to act if incoming data showed significantly higher prices or rising inflation expectations, but for now it is monitoring developments and waiting to see how the conflict evolves.

The issue is especially sensitive because energy prices influence not only household bills but also transport, manufacturing, and food costs across the currency bloc. If disruptions deepen, the effects could spread beyond the initial shock and reach broader parts of the economy, which is why ECB officials are signaling close vigilance rather than offering firm predictions.

For now, the message from the central bank is one of caution: the conflict has the potential to affect the euro area economy in ways that are both immediate and lasting, and the next moves will depend heavily on how the war unfolds and how energy markets respond.