The Triple Shock Hitting Europe: Iran War, Energy Prices, and Climate-Driven Food Inflation

A CIO report noted that the first March inflation figures from Spain and Germany confirmed a jump from energy prices but had "no effect on other prices"—core inflation stayed unchanged in both countries at that point . However, by April, the energy shock was visibly feeding into headline numbers across the board.

The Iran War and the Energy Shock

The conflict, which erupted in late February 2026 between the U.S., Israel, and Iran, has effectively closed the Strait of Hormuz—the narrow waterway through which about 20% of global oil and gas flows . The market impact was immediate and extreme.

Brent crude surged from around $60–65 per barrel before the war to above $110 by late April. Reports documented spikes as high as $126 per barrel intraday before retracting . On March 9, Brent had already surged over 25% to more than $93 . By March 18, it hit nearly $110 after Israel struck a major natural gas reserve . As of late April, the World Bank confirmed that Brent prices remained more than 50% higher than at the start of the conflict .

The World Bank's Commodity Markets Outlook projects a 24% surge in overall energy prices in 2026, the largest since Russia's invasion of Ukraine in 2022 . Overall commodity prices are forecast to rise 16%, driven by soaring energy and fertilizer prices . A Reuters poll of economists found that 59 of 70 now expect the ECB to hike rates in June .

Climate-Driven Food Shocks Compound the Pain

While the energy story dominates headlines, a quieter but persistent driver is amplifying the inflation problem: climate change. Oxford Economics has warned that the eurozone faces the worst food price shock among G7 economies from climate extremes, estimating that extreme weather could add up to 1.6 percentage points annually to food inflation .

This warning builds on already elevated food inflation. Euro area food inflation averaged 2.9% across 2025 and has remained above its pre-pandemic long-term average of 2.2% since December 2021 . The ECB's own analysis notes that food inflation has been driven by a handful of items—coffee, tea, cocoa, sweets, and meat—which together accounted for over 50% of the above-average rate .

Separate research from the Oxford Martin School found that extreme weather and poor harvests have pushed food prices up by 50–100% in some exposed countries . A 2025 ECIU report showed that prices for climate-impacted foods rose by an average of 15.6% year-on-year, compared to just 2.8% for other food items .

The mechanism is not only direct crop damage. Higher energy prices feed through to fertilizer costs, making food production more expensive. As one analysis noted, "the reduction in gas supplies feeds through the fertiliser production in a few months as stockpiles dwindle making it unavailable to farms at the start of planting season" .

The ECB's Policy Reversal

The confluence of these shocks has forced a rapid about-face from the ECB. After holding rates at 2.00% in April 2026 , the central bank left little room for doubt that it is preparing to raise interest rates as soon as its June 11 meeting .

A Reuters poll published May 13 found that 59 of 70 economists expect a 25-basis-point hike to 2.25% at that meeting . A Bloomberg survey showed a majority of economists expecting two rate increases in 2026, and Polymarket traders priced the probability of a June hike at 76.5% . Deutsche Bank and JPMorgan both revised their forecasts to expect 25-basis-point hikes in June and September .

Le Monde reported that ECB President Christine Lagarde persuaded the Governing Council to unanimously vote to hold in April, but that the central bank is now "buying time" as uncertainty over the Iran war and its economic impact persists . Inflation is now running a full percentage point above the ECB's mandate .

Growth Slashed as Inflation Bites

The European Commission's spring 2026 forecast painted a sobering picture: eurozone inflation revised up to 3.0% for 2026, while GDP growth was cut to just 0.9% . The ECB itself raised its 2026 inflation forecast to 2.6% from 1.9%, and its 2027 forecast to 2.0% .

Oxford Economics cut its 2026 G7 consumer spending forecast by 0.6 percentage points, warning that the drag from higher energy prices and financial spillovers will leave spending 0.3% below trend even after two years . McKinsey's Global Economics Intelligence noted that Oxford Economics now expects just 0.8% eurozone growth this year, while the IMF anticipates 1.1% .

A note on consumer expectations: The claim that consumer inflation expectations jumped to 4.0% could not be verified from the available sources. The ECB's April statement noted that inflation expectations are being closely monitored, but the specific figure remains unconfirmed.

What Comes Next

The trajectory depends heavily on two unpredictable variables: the duration of the Iran conflict and the severity of climate impacts on this year's harvests. The World Bank's baseline forecast assumes oil prices moderate from recent peaks but remain elevated . Oxford Economics warns that the eurozone should expect more frequent adverse supply shocks, with food prices serving as a key transmission channel .

For now, the evidence is unambiguous: Europe's largest economies are caught in a triple shock with no obvious off-ramp. The ECB's June meeting will be the first real test of how aggressively it is willing to act when inflation is driven by supply-side forces that interest rates alone cannot fully control.