March inflation data offer initial evidence of the impact of the increase in energy prices due to the war in the Persian Gulf. Unsurprisingly, prices in Europe increased, albeit modestly (see Chart 1). In the eurozone, headline inflation rose from 1.9% to 2.5% year-on-year, and in Switzerland it increased from only 0.1% to 0.3% year-on-year.
March PMIs: scent of stagflation
Investment Insights • Macro
2 min read
European inflation on the rise – how the energy mix matters for economies
The March consumer price index data show the first effects of the energy price shock due to the war in the Persian Gulf. In this Macro Flash Note, Senior Economist and Strategist GianLuigi Mandruzzato observes that risks to future inflation are on the upside and that the effects will be asymmetric across Europe.
However, the risk is that increases in production costs have not yet been passed on to the prices of final goods and services. The surge in the price paid index in the purchasing managers’ index (PMI) surveys, considering both the manufacturing and services sectors, suggests that inflation may increase in the coming months (see Chart 2). How much inflation will change will depend on the duration of the shock, which remains uncertain.
However, two structural aspects will influence how much inflation will rise in the European economies: the weight of energy in the consumer price basket and the countries' energy mix.
The importance of the first aspect emerges from the observation of increases in the inflation rate in the 21 eurozone member countries and Switzerland between February and March. As Chart 3 shows, there is a positive correlation between the share of energy spending in households’ overall consumption and the change in inflation. The outliers, highlighted in orange, are Italy, Slovenia, and Slovakia where governments have adopted aggressive measures to contain the rise in fuel prices.
Switzerland, in black in the lower left-hand corner of the scatter plot, shows that a lower weighting of energy in the CPI basket leads to a smaller increase in overall inflation.
Switzerland will also benefit from a more favourable energy mix than other industrialised countries. According to International Energy Agency data, in 2024, almost all electricity generated in Switzerland came from renewable sources or nuclear energy, and only about 40% of national energy supply came from fossil fuels. By comparison, the eurozone's dependence on fossil fuels was still over 65% of the total in 2024, although this share has been declining over the last decades.
In conclusion, the rise in oil and natural gas prices has already influenced the March inflation data in Europe. Unfortunately, many indicators suggest that the upward pressure on consumer prices will continue in the coming months, barring a sudden de-escalation of tensions in the Middle East.
In this context, countries where energy accounts for a larger share of household consumption and where the energy mix is more dependent on fossil fuels will be most exposed. On both these regards, Switzerland is in a better position than the eurozone.