Inflation forecast : 2.5% in 2026, potentially 4% in the event of a prolonged conflict in the Middle East

• In the baseline scenario, inflation in Luxembourg is projected to stand at 2.5% in 2026 and 1.7% in 2027. However, these forecasts are subject to exceptionally high uncertainty, linked to the consequences of the conflict in the Middle East (particularly if the Strait of Hormuz were to remain blocked for a prolonged period) and the spillover of this shock to the wider price level. Inflation for 2026 as a whole could therefore range from 2.3% (in the event of a rapid de-escalation) to around 4% (if the conflict drags on).
• Two wage indexation tranches are expected over the forecast horizon in the central scenario: one would take place in June 2026 (following its triggering in May), followed by a second tranche in the second quarter of 2027. In the high scenario (prolonged conflict), an additional tranche would be triggered as early as the third quarter of 2026.
• The current shock remains concentrated on petroleum products for the time being, with the impact on gas being significantly more limited than in 2022. Second-round effects are, however, expected with a lag of several months, particularly via food prices: rising gas prices are passed on to nitrogen fertilisers and, through this channel, to agricultural production costs, explaining the rise in food inflation in 2027 (3.3% after 2.9% in 2026).

After a beginning of the year marked by a decline in inflation, geopolitical tensions in the Middle East have reignited pressure on energy prices and darkened the economic outlook. Disruptions to maritime traffic in the Strait of Hormuz, a strategic route for global trade in oil and liquefied natural gas, have increased volatility in energy markets and led to a marked rise in fuel prices worldwide. Assuming that the conflict remains limited in duration, inflation in Luxembourg would reach 2.5% in 2026, driven by a strong rebound in energy inflation. This would turn negative again in 2027, while second-round effects—notably through food prices—would continue to strengthen, bringing inflation to 1.7% in 2027. The triggering of the next wage indexation tranche is expected this month and would be followed by a further tranche in the second quarter of 2027. Given the considerable uncertainties surrounding the international environment, developments could nevertheless fall within a wide range, spanning the different scenarios outlined by STATEC.

Annual inflation rate and contributions

_{Source: STATEC (forecasts as of 06/05/2026)}

The international environment marked by uncertainty

The international economic environment has deteriorated markedly in recent weeks, following the outbreak of war in Iran. This renewed escalation of geopolitical tensions has reignited uncertainty and weighed on energy and commodity markets. Risks are concentrated in particular around the Strait of Hormuz, a strategic transit point for a significant share of global trade in oil and liquefied natural gas. Disruptions to maritime traffic, higher operational risks in the region, and rising insurance costs have led to increased volatility in international energy markets. Flows through the strait have been severely disrupted since late February 2026, with an estimated reduction of around one seventh of global oil supply over the period. In Luxembourg, these tensions are, at this stage, mainly reflected in energy products, particularly diesel and its derivatives[1]. Between January and April, prices for heating oil and diesel rose sharply, by 78% and 45% respectively, contributing to a pronounced rebound in inflation, which once again exceeds 3% in April.

The current geopolitical shock is therefore reigniting inflationary pressures, although its magnitude would remain well below that observed in 2022, according to the scenarios presented below. During Russia’s invasion of Ukraine, the energy shock amplified an already well‑established inflationary dynamic, driven by an environment marked by severe supply constraints and persistent tensions in supply chains, still affected at the time by health-related measures in force in several countries. Today, the impact of the energy shock is mainly concentrated on fuels, while spillovers to gas prices remain much more limited. This reduces, at this stage, the risk of an inflationary spiral comparable to that observed in 2022.

[1] Diesel and its derivatives remain significantly more expensive than gasoline, due to structural supply tensions, heightened global competition for limited volumes, and diesel’s central role in the transport sector. Geopolitical instability, particularly the conflict in Iran, has reinforced these imbalances. In Europe, refining capacity and the quality of available crude oil do not fully match regional demand, which is largely oriented toward diesel, thereby increasing dependence on imports of this type of fuel.

Forecasts based on alternative assumptions

^{Source: STATEC (forecasts as of 06/05/2026)
*These forecasts incorporate an increase in the CO₂ tax of EUR 5 per tCO₂e in 2026 and 2027.
** These forecasts incorporate an increase of EUR 5 per tCO₂e in the CO₂ tax in both 2026 and 2027.
***Average prices including VAT for a residential customer in Luxembourg with an annual consumption of 2,426 m³ of gas and 3,901 kWh of electricity. These prices are calculated assuming, for electricity (based on the Ministry of the Economy’s assumptions), a return of the contribution to the compensation mechanism to –0.001 EUR/kWh for 2026 and 2027, as well as a reduction in network usage tariffs of around 35% in 2026 compared with 2025.}

In the central scenario of the current STATEC forecast, based on Oxford Economics projections from April 2026, a ceasefire would prevent a major escalation, even though a full return to normal conditions would occur only gradually. In this context, the price of Brent crude would average USD 113 per barrel in the second quarter of 2026, before easing back towards USD 80 per barrel by the end of the year. This temporary rise in energy prices, combined with the increase in several commodity prices observed since the onset of the conflict in Iran—particularly agricultural inputs such as nitrogen-based fertilizers—would push euro area inflation to 3.3% in the second quarter of 2026, i.e. less than one third of the peak reached in 2022. The magnitude of the shock would therefore remain significantly more contained than during the previous inflationary episode. The average Brent price observed in April was close to the level expected for the second quarter, supporting this trajectory. A favorable outcome to the negotiations initiated since the ceasefire of 8 April could lead to lower prices, while a failure of the talks would result in renewed escalation—two configurations explored in the alternative scenarios.

In Luxembourg, the impact of the shock would initially materialize through inflation in petroleum products, whose prices would rise by 12.4% in 2026. Energy inflation would thus reach 6.6% in the same year, before recording a decline of a comparable magnitude in 2027, as energy prices normalize with the gradual recovery of traffic through the Strait of Hormuz. Second-round effects would then gradually emerge from late 2026 onwards, notably affecting food prices. The strong dependence on fertilizers transiting through the Strait of Hormuz plays a particular role in this transmission. Since the beginning of the conflict, prices of granular urea have increased by around 50%, while ammonia prices have risen by approximately 20%. This increase is mainly driven by higher natural gas prices, which are the primary input in the production of nitrogen-based fertilizers. Combined with the ongoing planting season in the Northern Hemisphere, this rise in agricultural input costs would be passed on to food prices with an estimated lag of 6 to 12 months, contributing to the persistence of food inflation in 2027. As a result, food inflation would reach 2.9% in 2026 and 3.3% in 2027. Finally, more diffuse effects would affect services and non-energy industrial goods, whose inflation rates would rise moderately, from 2.7% to 2.9% and from 1.0% to 1.1% respectively in 2026 and 2027. Overall, inflation in Luxembourg would amount to 2.5% in 2026 before easing to 1.7% in 2027.

According to these projections, which constitute the central STATEC scenario, the next wage indexation would take place in June (following its triggering in May), and would be followed by another tranche in the second quarter of 2027. This schedule brings forward the second tranche by one quarter compared with the February 2026 projections, which had anticipated a second tranche in the third quarter of 2027.

Between escalation and de-escalation: what are the risks for inflation?

Given the particularly high level of uncertainty, the central scenario is complemented by two alternative scenarios, mainly focused on diverging trajectories for Brent crude prices. While the low scenario corresponds to a technical scenario based solely on differences in energy prices, the high scenario constitutes a comprehensive macroeconomic scenario of a prolonged conflict, incorporating second‑round effects across the entire economy.

In the high scenario, characterized by an intensification and prolongation of the conflict, tensions in energy markets would reach a significantly higher level than in the central scenario. The effective closure of the Strait of Hormuz would last for around six months, accompanied by increased disruptions on other maritime routes and more extensive damage to energy infrastructure. In this context, energy prices would remain persistently high, as the closure of the Strait of Hormuz would drive global inventories below critical levels[2]. Brent crude would average USD 190 per barrel in August 2026 and remain above USD 150 per barrel for nearly four months. Gas prices would follow a similar trajectory, amplifying the energy shock and triggering a synchronized contraction in global activity—less severe than that associated with the pandemic or the global financial crisis, but quasi‑simultaneous and more pronounced than any other global slowdown observed over the past forty years. In the euro area, this situation would result in a sharp increase in inflation, reaching 6.6% in the third quarter of 2026, close to the peaks observed in 2022. As pressures on supply chains would extend beyond the energy sector alone, more generalized cost increases would emerge, fueling broader inflationary tensions.

In this high scenario, the impact on inflation in Luxembourg would be significantly stronger and more persistent. The sharp rise in oil prices would first be transmitted to the energy component, with prices increasing markedly in 2026 (+22.4%), before posting a correction effect in 2027 (‑7.1%) as prices recede. This initial shock would then gradually spread to the rest of the economy. Second‑round effects would first appear in food prices from the fourth quarter of 2026 onwards, driven by the combined increase in energy inputs, fertilizers, and transport costs, peaking in the second quarter of 2027. Food inflation would thus amount to 3.1% in 2026 and 4.5% in 2027. At the same time, services prices would record a more pronounced acceleration, with inflation reaching 3.6% in 2027, while inflation in non‑energy industrial goods would rise to 1.7%.

Overall inflation would thus rise to around 4.0% in 2026 before easing to 2.4% in 2027. The sharp increase in petroleum product prices in the third quarter of 2026 would trigger an additional wage indexation tranche in the third quarter of that same year. Thereafter, although the decline in energy prices would exert a moderating effect, this would be partly offset by the strengthening of second‑round effects, notably via food and services prices. In this context, these pressures would remain sufficient to sustain an inflationary dynamic consistent with the triggering of a new wage indexation tranche in the third quarter of 2027.

The low scenario is based on a faster and more pronounced easing of energy prices. Brent crude prices would fall back towards USD 65 per barrel in the fourth quarter of 2026, before converging towards USD 60 throughout 2027. Gas prices would also continue the downward trend observed prior to the outbreak of the conflict, with a decline of around 10% in 2026 (compared with ‑6% in the central scenario and +7% in the high scenario), followed by a further decrease of 9% in 2027 (compared with +3% in both the central and high scenarios). In this context, energy‑related pressures would be significantly more limited. Energy inflation would thus stand at 3.5% in 2026, before falling sharply in 2027 (‑10%), reflecting the marked decline in oil and gas prices.

The pass‑through to the rest of the economy would remain more contained than in the central scenario, with second‑round effects remaining limited, both for food prices and for the other components of inflation. Overall inflation would thus reach 2.3% in 2026 before easing to 1.4% in 2027, falling below the threshold compatible with price stability. In this scenario, the timetable for wage indexation tranches would remain unchanged in 2026 compared with the central scenario, while the following tranche would occur in the third quarter of 2027, i.e. one quarter later than in the central scenario.

Given the high degree of uncertainty surrounding the international environment, the outlook remains particularly fragile and subject to rapid changes. In a context marked by strong dependence on geopolitical developments, abrupt shifts—whether in the form of escalation or, conversely, de‑escalation—could significantly alter the trajectories described. Developments could therefore fall within a wide range, lying between the central and high STATEC scenarios, or even temporarily diverging from them depending on the speed of adjustment in energy markets and the responses of economic agents.

[2] Taking into account the scale of the supply shock associated with the closure of the Strait of Hormuz, global inventories could reach critical operational levels within a matter of weeks—typically around one month—despite the existence of strategic reserves equivalent to approximately 90 days of imports in countries of the International Energy Agency (IEA).