Russia's war against Ukraine continues to resonate in the global economy and exacerbate the rise in prices. Eurozone headline inflation will reach its highest level since the inception of the euro, primarily due to the rise in energy prices. This acceleration is likely to accelerate, as the situation after March will reflect the main impact of rising energy prices. The inflation pressure in question also has an effect in terms of eroding the spending power of households, so it may cause an inflation effect in the triangle of wages paid, demand and operating costs.

When we look at country-based data before tomorrow's composite data; While Germany reached the highest inflation rate after 1974 with 7.3% inflation in March (during the global oil crisis), France announced 4.5%, Italy 7% and Spain 9.8% inflation. The worsening outlook in inflation due to high energy prices will affect the data with a higher coefficient. Still, some Eurozone countries appear to be more affected than others. In Italy and Spain, the transition effect has been felt more directly, while in France, the energy price shock is not felt at the worst level for now, thanks to the government's upper cap on gas and electricity prices.

Eurozone, Germany, France, Italy and Spain CPI comparison… Source: Bloomberg

Increasing geopolitical uncertainty, rising energy prices, persistent supply constraints, and price pressures on their effects on production increase the expectation of a hawkish stance against inflation, just as the Fed has adopted. As the Ukraine war is added to the current headwinds and the inflation that will occur due to the rising cost of living crisis, at the same time, the companies' activities do not present a positive projection at the moment. Companies face a state of uncertainty regarding the impact of the war on rising prices, supply chains, and diminishing fiscal and monetary stimulus. After the outbreak of the Ukraine war, which increased commodity prices, price indicators will lead to a higher coefficient to be seen in the coming months regarding the negative consequences of the war. The occupation of Ukraine, which started at the end of February, increased input costs as of March and its pass-through effect on prices will feed inflation.

Increasing price pressures will be watched more closely by the ECB. It is not expected that the ECB will be as hawkish as the Fed, due to a Eurozone economy that will be directly affected by the Russian crisis, especially in the energy input leg, and may experience a demand shock. However, we think that the ECB will show its willingness to increase interest rates against rising inflation.

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