[U.S.–Iran War] Europe Faces the First Blow, EU Warns Inflation Could Exceed 3% if Oil Stays at $100

Energy price surge and economic slowdown emerging simultaneously
Moves to consider and implement wartime-style price control policies
Manufacturing-heavy economies such as South Korea and Japan reveal vulnerabilities

Warnings have emerged that inflation in Europe could return to an upward trajectory if the war in the Middle East becomes prolonged. Observers say the conflict could weigh on economic growth as its impact spreads across financial markets and global supply chains. In Europe, a structural pattern in which energy price increases rapidly feed through into consumer prices and industrial costs has already been confirmed, prompting wider discussions of policy responses among governments. At the same time, some analysts suggest countries such as China and Russia could benefit indirectly from rising energy prices, while major Asian economies are preparing for the spread of energy shocks through measures such as releasing strategic oil reserves and imposing price controls.

Rising Concerns Over a Renewed Global Inflation Wave

According to Bloomberg, Valdis Dombrovskis, the European Union’s commissioner for the economy, said at a recent meeting of EU finance ministers that if Brent crude prices remain around $100 per barrel and gas prices stay elevated for an extended period due to the Middle East war, EU inflation this year could exceed 3%. He added that under such a scenario, EU economic growth could fall by as much as 0.4 percentage points from the 1.4% forecast made at the end of last year. Dombrovskis also warned that further downside risks to the economy cannot be ruled out depending on how the war affects financial markets, trade, and supply chains.

The commissioner presented the assessment based on the assumption that European gas prices would remain at about $472 per megawatt-hour for the rest of the year. If energy prices remain elevated for a prolonged period, the resulting cost increases across energy-intensive industries such as electricity, transportation, and chemicals are likely to pass through to consumer prices. Markets are therefore watching whether inflationary pressure could lead the European Central Bank to raise interest rates. However, with the ECB’s next monetary policy meeting scheduled for the nineteenth, the likelihood of an immediate rate increase appears limited.

Nevertheless, concerns over supply disruptions continue to grow as tanker traffic through the Strait of Hormuz—one of the world’s most critical oil transportation routes—has nearly come to a halt. Brent crude prices in the European energy market have surged since the outbreak of the Iran war and remain above $90 per barrel. In response, the International Energy Agency announced that member countries had agreed to release 400 million barrels of strategic oil reserves in an effort to cushion the energy market shock. Even so, market participants widely believe the conflict could trigger a repeat of the “energy-driven inflation shock” seen during the Ukraine war.

As these concerns spread, European governments have begun introducing measures that resemble wartime price-control policies. Germany is moving to limit gas station fuel price changes to once per day, while Greece has imposed caps on profit margins for fuel and food over the next three months. Italy is reviewing a plan to use increased value-added tax revenue generated by rising fuel prices to ease consumer burdens while strengthening penalties against price hikes exploiting the crisis. Discussions are also underway at the EU level. European Commission President Ursula von der Leyen said the bloc has begun reviewing a natural gas price cap in order to prevent rising gas prices from feeding directly into electricity bills.

China and Russia Seen Benefiting From the Shock

Many international research institutions also share the view that the war could have a greater economic impact on Europe than on the United States. Oxford Economics estimates that increases in energy prices have more than three times the effect on eurozone inflation compared with the United States. Analysts note that the EU relies on imported fossil fuels for about 58% of its total energy consumption, heightening its vulnerability. Because rising energy prices simultaneously increase electricity costs and industrial production expenses, the same commodity shock is likely to have a stronger impact on both inflation and growth in Europe.

Some analysts warn that the longer the conflict lasts, the more it could undermine Europe’s economic recovery. Antonio Barroso, an economist at Bloomberg Economics, said that if the war drags on and oil and gas prices remain high, governments will have to spend more fiscal resources to shield voters from rising prices. Such spending could ultimately translate into increased political pressure on national leaders. U.S. President Donald Trump has also suggested that the conflict—initially expected to last four to five weeks—could continue for longer, reinforcing expectations of sustained upward pressure on energy costs.

Meanwhile, some countries including China and Russia could benefit from higher energy prices. China remains the world’s largest crude importer, but in the 2020s it has built buffers against energy shocks by expanding investments in renewable energy and electric vehicles while maintaining coal usage. China is also estimated to hold more than 1 billion barrels of strategic petroleum reserves, providing relative insulation from rising oil prices. Russia, for its part, could see higher oil prices expand its fiscal capacity. If the United States eases certain sanctions out of concern for global economic disruption, Russian oil exports could increase further.

Echoes of the 2022 Ukraine War

In contrast, many Asian countries aside from China and Russia remain fully exposed to the risks of rising oil prices. Japan has responded by implementing inflation defense measures based on its strategic petroleum reserves. Japanese Prime Minister Sanae Takaichi announced that oil stockpiles would begin to be released as early as the sixteenth. Under the plan, reserves equivalent to fifteen days of domestic consumption will be supplied from private sector stockpiles, while an additional one month of supply will come from government reserves. The move is intended to ease inflationary pressure amid soaring energy prices triggered by the Middle East war. Japan’s total strategic petroleum reserves are estimated to cover roughly 254 days of consumption.

At the same time, the Japanese government plans to manage gasoline prices at roughly $1.07 per liter or below. The current nationwide average price stands at $1.02 per liter. Officials believe a surge in oil prices could increase the risk of stagflation in Japan while also intensifying pressure for additional fiscal spending, potentially complicating the Bank of Japan’s gradual normalization of interest rates. In an interview with NHK, Prime Minister Takaichi said that given continuing uncertainty surrounding the situation in the Middle East centered on the Strait of Hormuz, the government will remain flexible in reviewing additional support measures.

South Korea has also begun responding to potential energy shocks originating in the Middle East. The government introduced a fuel price cap this week for the first time since the 1979 Iranian Revolution. The measure aims to curb abnormal oil price increases and stabilize market sentiment. Authorities have also moved to secure supply chain stability. South Korea plans to import 4 million barrels of crude oil through ports in the United Arab Emirates that do not pass through the Strait of Hormuz, and it will be able to draw up to 2 million barrels from joint reserves that the UAE stores in South Korea when needed. South Korea’s total oil reserves currently cover approximately 208 days of consumption.

Despite these responses, however, the war is still expected to exert a significant impact on inflation. During Russia’s invasion of Ukraine in 2022, international oil prices exceeded $100 per barrel, pushing South Korea’s annual consumer price inflation rate to 5.1%. Kim Kwang-seok, head of economic research at the Korea Economic Industry Institute, said that while inflation surged more strongly in Europe and the United States during the Russia–Ukraine war, the current situation is very different. At that time the impact was indirect, stemming from disruptions to Russian oil supplies. Now, however, roughly 70% of South Korea’s imported crude oil comes from the Middle East, meaning that any disruption to those shipments could make it difficult to prevent inflation from rising within the next two to three months.