ECB to remain cautious as inflation rises and geopolitical instability threatens energy price volatility
Inflation in the Euro Area rose to 1.9% in February, up from 1.7% in January, marking a modest but notable pick up in price growth. While inflation remains just below the European Central Bank’s 2% target, the disinflation phase is evidently not on a smooth, one-way path.
Adding to this, heightening conflict in the Middle East in recent days has led to a substantial rise in energy prices, reminding the ECB — and all central banks — that they are always at risk of being thrown off course by external or international factors.
Yet inflation remains largely under control for now; but this is not necessarily a good thing, reflecting the sluggish European economy and lack of activity to drive up prices.
What is driving the increase?
While energy prices remain well below their peaks, base effects are fading and services inflation continues to prove sticky.
Wage growth, particularly in labour-intensive sectors, is feeding through to prices more slowly but more persistently than earlier forecasts suggested.
This reinforces the ECB’s view that underlying inflation pressures, while contained, are not yet fully extinguished.
What this means for ECB policy
For the ECB, today’s data reinforces a “hold, not hurry” stance. Inflation is close enough to target to avoid alarm, but the rise is a warning against premature policy loosening.
Implications for business
An inflation rate of 1.9% offers both reassurance and caution. Price growth close to target improves predictability for planning, contracts and investment decisions. It also supports real income growth without eroding purchasing power.
The inflation uptick and renewed fears of energy price rises reduce the likelihood of rapid monetary easing. Businesses should expect interest rates to remain at current levels longer, particularly if services inflation remains firm, providing businesses with a more certain environment to operate in.
Is this the first sign that underlying pressures remain stronger than expected? For business leaders, the answer will shape investment, pricing and hiring decisions through the remainder of 2026.
