Euro zone firms see new inflation surge if war lasts months, ECB poll shows

• Air travel, logistics, chemicals, plastics, and packaging industries have already raised prices by double-digit percentages due to surging oil prices from the Iran conflict
• Broader price pass-through is expected to be more gradual than during Russia's 2022 Ukraine invasion because large companies have hedged against energy price swings, with impact mainly coming through smaller unhedged suppliers
• Mitigating factors compared to post-pandemic inflation include weak global demand (especially from China), absence of expected services boom, and lower fiscal stimulus levels

Summary: Euro Zone Inflation Risks Tied to Iran Conflict Duration

The European Central Bank's quarterly survey of 67 large companies reveals significant inflation risks if the war in Iran extends for months rather than weeks, according to findings released May 4. The primary concern centers on disruptions to the Strait of Hormuz affecting supplies of fuel, hydrogen, and helium.

Key Findings:

Companies in air travel, logistics, chemicals, plastics, and packaging sectors have already implemented price increases, often in double-digit percentages, responding to surging oil prices since the conflict began. However, the broader price pass-through is expected to be more gradual than during Russia's 2022 Ukraine invasion, as large firms have hedged against energy price volatility.

Market Implications:

The ECB notes that protection measures should limit short-term impact, with price pressures coming primarily through smaller, unhedged suppliers. If the conflict persists for months with continued Strait of Hormuz blockades or attacks on oil/gas infrastructure, companies anticipate an inflation surge comparable to 2022-23 levels, affecting not just fuel but products requiring oil derivatives.

Mitigating Factors:

The ECB identified several elements that may dampen inflation compared to the post-pandemic period:

• Weak global demand, particularly from China
• Absence of an expected services sector boom
• Lower fiscal stimulus levels

Policy Context:

The ECB held interest rates unchanged last week while debating potential hikes to combat inflation, signaling possible future rate increases. The survey, conducted mainly between March 23 and April 1, provides critical input for monetary policy decisions amid evolving geopolitical risks.