German state inflation points to national uptick as Iran war heats up

BERLIN, March 30 (Reuters) - Inflation rose ‌to at least 2.5% ​in ​four German states in March, driven by energy price shocks from the U.S.-Israeli war on Iran, signalling that the national inflation rate is also likely to show ‌an increase in data due later on Monday.

In Germany's most populous state of ⁠North-Rhine Westphalia, the year-on-year inflation rate jumped to 2.7% in March from 1.8% in February.

That upward trend was also ‌reflected in the states of ‌Bavaria, Baden-Wuerttemberg and Lower Saxony, where the inflation rate rose to 2.8%, 2.5% and 2.6%, respectively.

Economists polled by Reuters expect harmonised inflation in Germany to rise to 2.8% in March, ​from 2.0% last month. The country's statistics office is due to publish the data later on Monday.

Holger Schmieding, chief economist at Berenberg Bank, said that though increases are currently ⁠driven by energy price shocks, it is only a matter of time until the war in Iran leads to price hikes ​across the board.

"Food prices may rise over time due to a shortage of fertiliser, and higher transport costs will have an impact on many ​sectors," Schmieding said in a statement, adding that inflation ‌could surpass 3% if the conflict drags on.

The Ifo institute released a survey on Monday showing that German companies expect to raise prices significantly ⁠as a result of the war. Its price expectations index rose to 25.3 points in March from 20.3 in February.

"Higher production and transport costs will also push up the prices of goods and services," said ⁠Ifo's Klaus Wohlrabe.

The German data comes ahead of the euro zone inflation release on Tuesday. Inflation in the ​currency bloc is expected to rise to 2.7% in March, according to economists polled by Reuters.

The U.S.-Israeli war on Iran has pushed energy prices sharply higher, and ECB policymakers are now debating whether and under ‌what circumstances they would need to raise interest rates to prevent this increase from seeping into the price of other goods and services.

Financial markets ‌now expect three interest rate hikes this year from the ECB, with the first coming in April ⁠or June, on the premise that ‌policymakers will be keen to ​move early after being criticised for misjudging the 2021/22 inflation surge.

(Reporting by Miranda Murray and Rene Wagner, writing by Friederike Heine, editing by Kirsti Knolle and ‌Jane Merriman)

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