Families to feel the pinch this winter as Central Bank predicts inflation rise

The Central Bank has issued a stark warning that inflation could surge to 5% in 2027 if the ongoing Middle East conflict continues, posing a serious threat to both economic stability and household budgets. The report outlines several possible scenarios, with the most extreme one suggesting that persistent hostilities could lead to a dramatic rise in energy and food prices, pushing inflation beyond current forecasts. This development comes amid growing concerns over the impact of geopolitical tensions on global markets, particularly concerning oil prices and supply chain disruptions.

According to the Central Bank, inflation forecasts were revised upward following the escalation of the conflict between the United States, Israel, and Iran, which began on 28 February. The war, which started with the assassination of Iranian Supreme Leader Ayatollah Ali Khamenei and other senior officials, has led to heightened volatility in global energy markets. Talks aimed at deescalating the situation are set to commence on Friday, though experts caution that resolving the crisis may take considerable time. Oil prices have already begun to decline, dropping below $80 per barrel on Tuesday, driven by optimism surrounding the potential reopening of the strategic Strait of Hormuz. However, the Central Bank emphasizes that even if peace talks succeed, restoring full economic stability could take months, given the complex nature of international trade and energy dependencies.

The report highlights that the primary driver of inflation is the increasing cost of energy, which has eroded real household incomes and dampened consumer confidence. Domestic demand, measured through Modified Domestic Demand (MDD), has shown signs of growth, albeit at a slower pace, as rising energy costs continue to weigh on purchasing power. Multinational investments, especially in sectors like artificial intelligence and data centers, have played a crucial role in sustaining MDD growth. However, the Central Bank notes that GDP experienced a sharp contraction in the previous quarter, largely due to fluctuations in the export of polypeptide hormones—commonly known as GLP-1s—which are used in weight-loss treatments. Despite continued demand for these products, year-on-year growth is expected to slow down.

The Central Bank has outlined three distinct scenarios for 2026 and 2027, each reflecting varying degrees of conflict resolution. Under the baseline scenario, inflation is projected to remain at 3.5% for 2026 and 2.9% for 2027. A milder scenario, involving a rapid resolution of the conflict, could see inflation dip below the baseline, with lower oil and gas prices stimulating consumer spending. Conversely, an adverse scenario—one where the conflict escalates and oil prices rise by 10% and 14% above the baseline—could push inflation up by 0.3 percentage points, potentially reaching 3.2% in 2027. In the worst-case scenario, prolonged conflict could result in oil prices soaring by as much as 32% and 63%, driving inflation close to 5%. Such a scenario would not only threaten economic growth but also exacerbate existing challenges, including supply chain disruptions and rising costs for essential goods like fertilizers and helium, which are vital for industries ranging from agriculture to technology.

The report also underscores the potential ripple effects of sustained high energy costs, noting that workers may demand higher wages to offset real income losses, which could then be passed on to consumers in the form of higher prices. While no widespread evidence of such effects has yet emerged, the Central Bank warns that the risk remains significant. Additionally, the seasonally adjusted unemployment rate reached 5% in the early part of 2026, marking the highest level since late 2021, indicating growing economic strain.

As the Central Bank continues to monitor the evolving situation, it urges policymakers to prioritize measures that protect vulnerable households while maintaining economic resilience. With the stakes high and the outlook uncertain, the coming months will be crucial in determining whether the conflict can be contained or if the specter of 5% inflation looms ever closer.