European Central Bank official warns of early stagflation signals in eurozone

Wednesday 13 May 2026 - 15:55

By: Dakir Madiha

European Central Bank official warns of early stagflation signals in eurozone

European Central Bank policymaker Olli Rehn has warned that recent economic data point to early signs of stagflation in the eurozone, linking weak growth and rising inflation to energy shocks driven by geopolitical tensions.

Speaking in Helsinki, Rehn said the latest indicators suggest the eurozone economy is slowing sharply while price pressures are strengthening. He pointed to first-quarter growth of just 0.1 percent in 2026 alongside inflation rising to around 3 percent. He described this combination as an early signal of a stagflation risk environment shaped by higher energy costs and external shocks.

The warning comes as monetary policy expectations shift across the eurozone. Markets are increasingly pricing in the possibility of interest rate increases at upcoming meetings, driven by persistent inflation above target levels. ECB President Christine Lagarde has recently acknowledged internal debate over tightening policy, while stressing that energy-driven inflation could remain elevated in the short term. Bundesbank chief Joachim Nagel has also signaled that further tightening could be justified if inflation forecasts do not improve.

Energy markets remain a central driver of the inflation outlook. Disruptions linked to the conflict involving the United States, Israel and Iran have pushed oil prices near 100 dollars per barrel, while European gas benchmarks have surged sharply since the start of the crisis. Higher import costs are feeding into consumer prices and business expenses across the euro area, reinforcing concerns that inflation could stay above target longer than expected.

At the same time, economic activity continues to weaken. Growth across the eurozone has slowed to near stagnation levels, raising concerns about the region’s ability to absorb tighter financial conditions. Economists warn that higher interest rates could further suppress demand, while maintaining loose policy risks entrenching inflation expectations at elevated levels. The ECB now faces a narrowing policy path ahead of its next key meetings.

Rehn said the current data already tell a worrying story, with both inflation and growth moving in an unfavorable direction. The upcoming policy projections are expected to play a decisive role in shaping the central bank’s response in the months ahead.