Middle East war shifts euro area firms' expectations
A recent ECB survey indicates that the war between the United States and Iran has immediately increased euro area firms' expectations for input costs, selling prices, and short-term inflation. The conflict, which began on February 28, 2026, quickly fed into business sentiment.
Immediate shock to costs and prices
Firms' expectations for input costs and selling prices rose significantly after the outbreak of the war in the Middle East on February 28, 2026.
Expected input costs climbed from 3.9 percent to 7.7 percent, while selling prices increased from 3.0 percent to 4.1 percent.
This sharp rise mirrors the surge in energy prices and the intensification of the conflict.
In contrast, wage cost expectations saw a modest decline from 3.0 percent to 2.8 percent.
The impact was not uniform across sectors; firms in energy-intensive industries, such as construction and transportation, anticipated the steepest cost increases.
This strong correlation suggests that the revised expectations were directly linked to firms' exposure to energy price fluctuations triggered by the war, highlighting the energy price channel as a primary transmission mechanism for the geopolitical shock.
Short-term inflation, dampened activity
The war also influenced firms' short-term inflation outlook, with one-year ahead expectations rising from 2.5 percent to 3.0 percent after the conflict began.
Longer-term expectations, however, remained stable, suggesting firms view the inflationary impact as temporary.
The conflict further dampened short-term expectations for business activity and access to finance.
Firms surveyed after February 28 reported a more pessimistic outlook for turnover, investment, and bank loan availability.
Sentiment on bank loan availability reversed, with a net 6 percent expecting conditions to decrease, highlighting increased lender risk aversion due to geopolitical instability.
Energy channel dominates, but not persistent
The survey clearly shows a supply-driven shock primarily through the energy price channel, affecting short-term costs and prices.
However, the stability of wage and longer-term inflation expectations suggests firms do not anticipate a persistent inflationary impulse.
This implies that while immediate disruptions are significant, the broader macroeconomic impact may remain contained if the conflict does not escalate further.