How might the Middle East conflict shape Europe’s inflation outlook?

The immediate economic fallout from war in the Middle East lies in the spikes in oil and gas prices, and in major disruptions to aviation and shipping. The countries most vulnerable to future inflation from the shocks are those that combine energy import dependency with weak external balances.

A sudden escalation of tensions in the Middle East has once again sent shockwaves through global energy markets. Following coordinated strikes by Israel and the United States against Iran on 28 February 2026, oil and natural gas prices rose sharply amid fears of supply disruptions. Brent crude rose above $84 per barrel, up from around $70, while natural gas prices in Europe and the UK spiked even more sharply.

While the jump in oil prices is comparable with the spike during the 12-day war in 2025, the impact on natural gas prices in Europe and the UK has been even more pronounced. This region relies heavily on imports, and it is particularly exposed to major chokepoints such as the Strait of Hormuz and the Suez Canal.

Figure 1 shows how the prices of Dutch TTF (title transfer facility) natural gas futures and UK NBP (national balancing point) natural gas futures have almost doubled following the first strikes on Iran. These benchmark futures prices are critical because they act as the market’s early warning system, reflecting the expectation of a potential gas shortage due to supply chain disruption and potential cost increases.

It is important to note that most countries have some system of price caps to protect households from short-term volatility in energy prices. This means that we may not expect an immediate increase in households’ energy bills, although the future prices will still affect the future levels of price caps.

Figure 1: Natural gas futures have almost doubled since the beginning of the war

Source: U.S. Energy Information Administration; Investing.com

Trade and transport disruptions spread the shock

The economic fallout is not limited to energy markets. High-frequency indicators of economic activity show immediate disruptions in both the aviation and shipping sectors.

In aviation, Eurocontrol data point to a sharp drop in flight numbers operated by Middle Eastern carriers and for large airline companies that have exposure to the region after large parts of regional airspace were closed (see Figure 2).

Figure 2: Number of flights, seven-days moving average, percentage year on year

Source: EUROCONTROL (via CEIC)

Local data providers in India and China also reported sudden declines in international arrivals and widespread cancellations, reflecting airlines’ efforts to reroute or suspend services (see Figures 3 and 4).

Figure 3: India air traffic: international flight arrivals, seven-day average

Source: Airports Authority of India (via CEIC)

Figure 4: Total flight cancellation rates in China, by country, VariFlight

Source: VariFlight (via CEIC)

In shipping, the impact has been even more concentrated. Ports in Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (all of which depend on the Strait of Hormuz) have recorded significant falls in tanker movements, especially for oil and liquefied natural gas (LNG). Freight and insurance costs for vessels have surged accordingly, reflecting the additional risk premium stemming from port congestions and delivery times.

This surge is reflected in the Baltic Exchange LNG (BELNG) index (see Figure 5), which is a benchmark metric for the shipping industry, measuring the overall cost of transporting LNG across major gas routes, including the Gulf region.

Figure 5: Baltic Exchange indices

Source: Baltic Exchange Information Services Limited

Which economies are most exposed? Import dependency matters

Beyond the immediate effects that can be seen in the countries that have direct exposure to the region, the conflict has the potential to have substantial effects on the global economy. The countries most vulnerable to an energy-driven shock are those that depend heavily on imports to meet domestic energy needs.

Figure 6 illustrates this clearly for G20 countries: major manufacturing economies such as Germany, Italy, Japan, South Korea and Turkey all have high import shares; while energy-rich countries like Australia, Canada and Saudi Arabia may benefit from higher energy prices.

Figure 6: The share of energy imports in overall energy use – negative (positive) values indicate that the country is a net energy exporter (importer)

Source: World Bank

Although the latest available figures are for 2023, import dependency has also been persistent, as can be seen in Figure 6. It barely changed during the Covid-19 pandemic or after Russia’s full-scale invasion of Ukraine in 2022, implying limited scope to substitute away from foreign energy supplies in the short term.

But dependency alone does not determine vulnerability. The risk becomes more serious when a country also has weak external balances. Countries like Turkey and the UK fall into this category, combining elevated energy dependency with historically weak current account positions. A prolonged rise in energy prices would worsen their terms of trade, and increase pressure on external financing and exchange rates.

A similar pattern emerges when combining import dependency with inflation. Because energy makes up a large share of the total consumer inflation basket, both directly and indirectly, higher energy prices may pass through to domestic inflation.

Figure 7 demonstrates the nexus between inflation and energy dependency. Economies with both high dependency and high inflation sit in the upper-right quadrant. Again, the UK stands out with above-target inflation compared with its European peers, while Argentina and Turkey remain extreme outliers with inflation rates still hovering above 30%.

Figure 7: Energy price shocks may escalate inflationary pressures in Europe – energy import dependency charted against inflation using the latest available data

Source: World Bank; IMF

Europe’s gas problem: low storage amplifies the shock

The natural gas price surge is hitting Europe at a particularly vulnerable moment. Seasonal heating demand typically reduces storage in early spring, but levels this year are even lower than in recent years. As Figure 8 shows, gas storage in the European Union (EU) is currently slightly below 10% of annual consumption, lower than the same point in the last three years.

Figure 8: EU gas storage levels are below previous years (share of annual consumption)

Source: Gas Infrastructure Europe

The picture is especially concerning for France, Germany and the UK, where storage levels have fallen back towards the lows reached during the early stages of the Russia–Ukraine war in 2022. Low storage levels make the system more sensitive to supply disruptions and thereby amplify price volatility, exactly what we saw following the strike on Iran, with gas prices in Europe nearly doubling.

This is a worrying signal, as it mirrors what happened following the Russian invasion of Ukraine, when a sudden supply shock pushed energy prices sharply higher and quickly fed through into inflation. Sooner or later, these additional costs for suppliers will be passed on to consumers.

What sort of an impact are we talking about? In earlier work published on the Economics Observatory, which was based on the National Institute Global Macroeconomic Model (NiGEM), I found that a $10 permanent rise in oil and gas prices increases average annual inflation by around 0.5 to 0.7 percentage points in advanced economies.

Combining this with the additional effect coming from an increase in shipping and insurance costs, we are talking about a total impact of about 1 percentage point for Western Europe, including the UK. Obviously, the overall effect will depend on the monetary and fiscal policy reactions from central banks and governments, and the ability of importers to pass on cost increases to final consumer prices – what economists refer to as supply and demand elasticities.

What does all this mean for monetary policy?

The current inflation picture across Europe remains uneven. Although headline inflation has fallen below target in core economies such as France, Germany and Italy, partly due to a weak recovery in economic activity, several other countries – including Hungary, Ireland, Latvia and Romania – continue to face relatively high price pressures. The UK, meanwhile, had been on track to bring inflation below 3%, but the recent surge in natural gas prices risks slowing or even reversing this trend.

In this environment, monetary policy-making is particularly complicated. In the eurozone, the European Central Bank (ECB) ended its rate-cutting cycle in June 2025 as inflation returned to target. Since then, there have even been calls for additional cuts, given the fragile and uneven recovery across member states.

But as the ECB’s chief economist Philip Lane recently noted, the renewed rise in energy prices will add upward pressure on inflation in the near term. This makes further near-term rate cuts highly unlikely.

The same dynamic applies to the Bank of England. Before the latest geopolitical shock, markets expected two rate cuts (in March and June) as inflation moved steadily lower. But with energy-driven inflation risks rising again, the Bank is now more likely to hold rates steady at upcoming meetings. If the conflict escalates and oil prices climb further, the Bank could even face pressure to tighten policy again, as suggested by new analysis from the National Institute of Economic and Social Research (NIESR).

Yet it is important to recognise that central banks are not well equipped to deal with supply-side shocks. Raising interest rates in response to higher energy and shipping costs risks compounding the problem: firms already grappling with elevated input costs face even tighter financial conditions, potentially amplifying the slowdown without meaningfully addressing the source of inflation.

For this reason, most central banks are likely to look through temporary cost shocks unless there are signs that the energy price spike is feeding into wages and broader price-setting behaviour.