Higher energy prices pushed inflation across the eurozone further above the European Central Bank’s 2% target in May, reinforcing expectations that policymakers will raise interest rates next week.

Inflation in the 21-nation currency bloc rose to 3.2% in May, up from 3.0% in April, marking a fourth consecutive monthly increase and the highest level since September 2023, according to Eurostat data released Tuesday. Economists surveyed had also forecast a 3.2% reading.

Before the escalation in Middle East tensions and the disruption linked to the Strait of Hormuz, inflation had been hovering near target for about a year, briefly dipping to 1.7% in January. At that time, European Central Bank President Christine Lagarde described monetary policy as being in a “good place.”

The situation has shifted sharply as the conflict pushed global oil and natural gas prices higher, with the eurozone particularly exposed due to its reliance on energy imports. The shock has revived inflationary pressure across goods and services.

Investors have now fully repriced the ECB’s policy path. Markets expect a rate increase to 2.25% from 2.0% at the June 11 meeting, which would be the first hike in nearly three years. LSEG data also shows expectations for one to two additional quarter-point increases by year-end.

ECB executive board member Isabel Schnabel signaled support for tighter policy, warning that policymakers can no longer ignore the shock. “We can no longer look through this shock,” she said at a conference in Korea.

Business surveys suggest inflation risks may be broadening beyond energy. A European Commission survey shows more firms plan to raise prices in the coming months than at any point since the aftermath of Russia’s invasion of Ukraine, raising concerns about persistent inflation expectations.

Manufacturing data also showed input costs rising at their fastest pace since May 2022, while selling prices increased at the strongest rate in three and a half years. Economists warn this could feed into wage demands and prolong inflation pressures.

At the same time, growth remains weak. Eurozone GDP expanded just 0.1% in the first quarter, while services activity contracted at its fastest pace since early 2021, highlighting the fragile backdrop for policymakers as they consider tightening further.

Despite some recent easing in oil prices, they remain around 30% higher than in February. With inflation still likely to remain above target into next year, attention now turns to how strongly the ECB signals its policy stance at next week’s meeting.