Consumer prices in the eurozone jumped at their fastest monthly pace since October 2022, driven largely by the energy shock from the Iran conflict. Economists are divided over whether the European Central Bank will respond with an interest-rate hike.

Eurostat’s flash estimate on Tuesday showed annual inflation rose to 2.5 percent in March, up from 1.9 percent in February. Month-on-month, prices increased 1.2 percent, marking the steepest monthly rise since October 2022. Energy prices were the main driver, climbing 4.9 percent year-on-year after falling 3.1 percent in February. Brent crude has surpassed $110 per barrel, while European natural gas prices have surged roughly 80 percent year-to-date.

Core inflation, which excludes energy, food, alcohol, and tobacco, actually eased slightly to 2.3 percent from 2.4 percent. Services inflation fell to 3.2 percent, and non-energy industrial goods dropped to 0.5 percent, suggesting the spike is primarily a first-round energy shock.

The impact of rising prices varies across the bloc. Croatia recorded the highest annual inflation at 4.7 percent, followed by Lithuania at 4.5 percent, Ireland at 3.6 percent, and Spain and Greece at 3.3 percent. Germany saw a rise to 2.8 percent, up 0.8 points from February. Italy and France reported 1.5 percent and 1.9 percent, respectively. Analysts say these differences reflect how energy costs reach consumers, with Italy relying heavily on natural gas, Spain’s short-term tariffs passing wholesale spikes quickly, and France’s nuclear generation and regulated electricity contracts limiting spillover.

The inflation rebound has reignited debate over the ECB’s next move. President Christine Lagarde acknowledged that even a temporary overshoot could warrant action but stressed that the bank would be guided by data, not forecasts.

Market expectations indicate a 36 percent chance of an April rate hike, with June priced at a 76 percent probability for a 25-basis-point increase. Analysts at ABN AMRO expect two “insurance hikes” this year to anchor inflation expectations, while Bank of America sees rate hikes more likely later in the summer, depending on the persistence of the energy shock.

Economists note that households and firms remember the 2022 inflation surge vividly, which may influence consumer behavior and slow spending. BNP Paribas predicts core inflation will remain stable through the second quarter, assuming Brent stays above $100 per barrel and the Strait of Hormuz remains closed without major infrastructure damage.

The ECB faces a difficult balance: act now to prevent inflation expectations from rising or wait for evidence that the energy shock is feeding into the broader economy. March’s data shows that while headline inflation has surged, core pressures have not yet intensified, giving policymakers some room for caution.

If oil prices remain elevated and energy costs continue to feed into the broader economy, the ECB may have little choice but to tighten policy in the coming months, even as it weighs the potential impact on growth.