Euro zone inflation jumps to 3% as economic growth almost stalls

• Inflation accelerated to 3% in April, up from 2.6% in March and 1.9% in February, driven primarily by fuel price increases from the Iran war and the Strait of Hormuz blockade
• The ECB is widely expected to hold its benchmark interest rate at 2% on Thursday as it assesses inflationary pressures versus growth concerns
• Economists warn of potential stagflation and urge the ECB not to raise rates, cautioning that policy tightening could trigger an unnecessary mini-recession in late 2026 or early 2027

Summary: Euro Zone Faces Stagflation Risk as Inflation Rises, Growth Stalls

The euro zone economy grew just 0.1% in Q1, while inflation surged to 3% in April, up from 2.6% in March and 1.9% in February—well above the European Central Bank's 2% target. These figures highlight mounting concerns about stagflation: a combination of stagnant growth, rising inflation, and potential unemployment increases.

Key Driver: Iran War Impact

The ongoing Iran conflict is disrupting global energy markets, with the blockade of the Strait of Hormuz—a critical oil and gas passage—forcing Europe to seek alternative suppliers amid heightened competition and demand. Fuel price increases are the primary inflationary pressure, creating uncertainty that weighs on business and consumer confidence.

ECB Decision

The European Central Bank is expected to hold its benchmark interest rate at 2% during its Thursday meeting as policymakers assess the situation. Berenberg economists warn against rate hikes, arguing that inflation risks are less severe than in 2022 and that tightening could trigger an "unnecessary mini-recession" in late 2026 or early 2027.

Market Implications

Economists cite multiple headwinds battering European economies: Trump tariffs, China's subsidized exports, and Iran war fallout. Even if the conflict resolves by end-April (the base-case scenario), European growth will likely lag last year's pace. The recommendation is for the ECB to maintain its current stance, as the inflation spike is viewed as temporary rather than structural.

Bottom Line

Europe faces a precarious balancing act between controlling inflation and avoiding recession, with energy security and geopolitical instability complicating the economic outlook for 2026-2027.