Geopolitical tensions in the Middle East are feeding inflation risks through potential energy disruptions, as U.S.-Israel actions in Iran and Iranian counterattacks raise the possibility of higher energy prices and delayed supply flows.

ECB Chief Economist warns that a prolonged conflict could push eurozone inflation higher and slow growth, with outcomes tied to how long and how wide the conflict lasts.

If the conflict shifts from a short flare-up to a drawn-out war, euro area inflation could head toward the 2.5% area or higher, with a longer duration intensifying uncertainty around price dynamics.

Equities fell in Europe, with the DAX dropping around 3.7% as energy and inflation concerns weighed on sentiment, and broader Wall Street outlook remained cautious.

ECB policy expectations point to no immediate March rate hike, with markets pricing in a roughly 25% chance of a move by year-end ahead of the March 19 meeting.

Inflation remains mixed across categories, with food, alcohol and tobacco steady around 2.6% while energy products fell year over year but eased less sharply in the latest readings.

Markets show that heating oil and natural gas prices have risen, suggesting consumer price effects could lag but persist as contracts adjust.

February euro-area inflation rose to 1.9% on stronger services prices and slower energy declines, with core inflation excluding food and energy at 2.4% year over year.

Short-term money market rates eased modestly after Middle East tensions, while long-term housing loan rates kept climbing gradually.

Gas prices surged to the highest levels since early 2023 amid LNG supply pauses and shipping disruptions, underscoring energy-market volatility.

Analysts warn a short war may cause only a temporary uptick, but a longer conflict could push oil toward $100 and lift inflation above 3% depending on pass-through.

ECB kept rates unchanged at the latest meeting, maintaining a stance that inflation should stabilize near 2% over the medium term and that the war’s effect on policy remains uncertain.