Brussels: Eurozone inflation is expected to rise sharply this year but return to close to the European Central Bank's 2% target in 2027, according to the bank's latest quarterly survey of professional forecasters on Monday. Respondents now expect inflation in the euro area to average 2.7% in 2026, a significant upward revision from 1.8% in the previous survey round. They forecast price growth of 2.1% in 2027 and 2% in 2028.

According to Anadolu Agency, the survey also pointed to slightly weaker economic growth expectations, reflecting growing uncertainty over the impact of the Middle East conflict and higher energy prices on the eurozone economy. A separate ECB corporate phone survey found that the broader pass-through from higher energy costs linked to the Iran war 'might be more gradual than in the past,' though it warned that price pressures could intensify if the conflict is prolonged.

The ECB kept its key interest rates unchanged last week, while signaling that a rate hike could be considered at its next meeting if inflation risks persist. Bundesbank President Joachim Nagel said Friday that an increase would be needed unless the outlook for inflation and growth improves significantly. Other ECB policymakers have sounded more cautious. Greece's central bank chief Yannis Stournaras warned that the risk of recession is 'real,' while Finland's Olli Rehn said there are 'no obvious signs' that war-driven inflation is becoming entrenched through higher wages and prices.

The ECB's focus has shifted to possible indirect and second-round effects, including pressure on wages, selling prices, and inflation expectations among households and businesses. The corporate survey said March's rise in oil prices was being transmitted quickly to prices for most oil-dependent goods and services. However, it noted that large firms appeared better hedged against energy price volatility than during the 2022 energy shock, helping limit the impact.

The survey warned that if the Middle East war is not resolved soon, it could trigger supply chain disruptions, putting further upward pressure on prices while weakening demand. Concerns were particularly focused on potential shortages of hydrogen and helium. 'Supply disruption of this nature could generate inflationary pressure more akin to that witnessed during the COVID-19 pandemic,' the survey said, while noting mitigating factors such as weaker global demand.

For most companies contacted by the ECB, the main concern was the war's impact on consumer confidence and final demand. On wages, firms still expect growth to moderate to 2.9% this year and 2.8% in 2027, down from 3.5% in 2025. However, some companies made small upward revisions to their 2027 wage expectations because of the war, while a larger number viewed the conflict as an upside risk.