Goldman Sachs raised its 2022 consumer price forecast. The bank's analysts believe that the increase in energy prices caused by the conflict in Ukraine is likely to push inflation in the eurozone to a new peak in May. Inflation in France exceeded experts' forecasts.

The first signs for European hawks: prices in the eurozone are rising

So, on Friday, February 25, the bank published a new forecast, raising its assumptions on inflation to 6.5% in May with a downward trend to 5.4% by the end of the year.

Experts note that while accelerating inflation will increase pressure on the European Central Bank, its negative impact on consumption suggests that policymakers may be more patient.

"The associated risks to operations and potential side effects to the fiscal outlook (especially in Italy) suggest that more patience may be needed in normalizing policy," the institution's report notes.

Inflation hit the eurozone

It is difficult to disagree with the position of Goldman Sachs representatives.

Before Russia's invasion of Ukraine, some agreement on raising interest rates was formed with great difficulty among European Central Bank officials.

But the conflict in Ukraine and the sanctions that followed have only complicated the ECB's efforts to smoothly abandon crisis-era incentives amid economic turmoil due to Russia's attack on Ukraine.

Even though the sanctions have not affected oil flows from Russia to Europe, the price of energy is rising.

Because of this, inflation in France accelerated more than expected.

Consumer prices in the eurozone's second largest economy have already increased by 4.1% in February compared to the previous year after rising by 3.3% in January, the national statistical agency Insee reported. This is the largest increase since the release of a number of data in 1997. Economists had forecast growth of 3.7%.

The inflation report in France showed that the energy sector grew by 21%. Prices for food, manufactured goods and services rose in February.

Separately, Insee reported that consumer spending in France in January decreased by 1.5% compared to December. Economists had forecast a 0.8% decline.

The statistical agency also reported that producer prices in the country increased by 22.2% in January compared to the same period last year. It confirmed a 0.7% increase in output in the fourth quarter of 2021.

The first swallow of European hawks

The inflation report in France is the first indicator of how prices have changed in the currency bloc this month — a key trend that the ECB will consider when it outlines its policy course at a meeting on March 10. Data for Germany and Italy will be published on Tuesday, and data for the entire euro area on Wednesday.

It should be assumed that higher-than-expected inflation will support those ECB policymakers who insist on stopping asset purchases with a subsequent rate hike soon after. More dovish participants insist that the upward pressure on prices is temporary, and advocate a slower approach.

However, the Ukrainian crisis has confused the calculations. While rising energy prices may lead to an even greater increase in inflation, the economic damage from Russia's actions and retaliatory sanctions may also prompt the institution to maintain incentives, forcing prices to rise again.

However, more and more politicians are inclined to tighten the monetary regime.

Thus, the governor of the Bank of France, Francois Villeroy de Gallo, said that the conflict in Ukraine means that the ECB will pay more attention to its flexibility in how it changes policy and at what speed. Last week, before Russia's full-scale invasion of a neighboring country, he called for an end to net asset purchases in the third quarter, but for a delay in deciding when to raise rates.

The ECB said on Thursday that it was "closely monitoring" the consequences of the situation in Ukraine and would conduct a comprehensive assessment at its March meeting.

Philip Lane, chief economist at the ECB, said at a meeting of politicians in Paris that the conflict in Ukraine could lead to a reduction in economic output in the eurozone by 0.3-0.4% this year.

This was the "middle scenario" presented by Lane at a meeting of the Board of Governors on Thursday, a few hours after Russia's invasion of Ukraine.

Lane also presented a hard scenario in which GDP shrinks by almost 1%, and a soft scenario in which events in Ukraine did not affect the currency bloc, which was now considered unlikely.

One source called these estimates "preliminary" calculations, another said they were "very preliminary," and a third said they were mostly derived from commodity prices.

All sources said Lane will present more accurate forecasts at the March 10 meeting, at which the ECB is expected to decide on the future of its stimulus program.

Lane did not provide new inflation forecasts, but said at the meeting that there would be a significant increase in the forecast for 2022, hinting at the same time that estimates at the end of the horizon could still be below the ECB's 2% target.