No one had anticipated the return of inflation on the 2026 agenda. After the inflationary spike triggered by Russia’s invasion of Ukraine, the prevailing scenario was that of a gradual normalisation driven by easing energy prices. But the conflict that erupted in the Middle East has changed everything. In just a few weeks, the risk of a lasting energy shock has re‑emerged, and with it, the prospect of a renewed surge in inflation. When the production, refining and transport capacities of a region so strategic for global energy are affected, it is not only the markets that tremble. The entire price chain comes under renewed pressure.
The European Central Bank has already factored this deterioration into its new March projections1. Its baseline scenario now forecasts inflation at 2.6% in 2026 in the euro area, compared with 1.9% expected in December, specifically due to the rise in energy prices linked to the war in the Middle East. The institution even outlined a “severe” scenario, assuming oil at USD 145 per barrel and gas at EUR 106 per MWh in the second quarter of 2026, followed by a very gradual decline. The consequences would be significant: in this scenario, inflation would reach 4.4% in 2026 and 4.8% in 2027.
Uncertainty remains high, but a shift is clearly underway. This is no longer a short‑term turbulence but a shock capable of durably unanchoring price expectations.
An Energy Shock of Unprecedented Magnitude
Signals from markets and international institutions all point in the same direction. According to the International Energy Agency, the conflict has caused the largest disruption to oil supply in history, with a loss of 11 million barrels per day in March. In our economies, we already see its effects at the pump. In other parts of the world, particularly in Asia, the missing volumes are causing shortages that directly hit human activity and economic performance. Regardless of how the conflict evolves, restoring production capacity may take months or even years: 40 energy infrastructures have been severely damaged so far across nine Middle Eastern countries.
In Europe, several countries are particularly exposed, notably Luxembourg’s main trading partner, Germany. Despite diversification efforts since 2022, its industrial model remains structurally vulnerable to gas‑related tensions. With energy instability intensifying and gas reserves at very low levels (only 22% full), the competitiveness of the German industrial sector could be severely tested. Other countries also enter this crisis with critically low reserves, including the Netherlands (around 6%), France (22%), and Belgium (22%), the latter being Luxembourg’s main supplier.
It is therefore highly likely that the crisis will last long enough to rekindle the negative spiral we had finally begun to halt: an energy shock that diffuses rapidly to transport, industry, and then across all production costs. It is this broad-based diffusion that transforms an initial shock into a wider inflationary dynamic.
Luxembourg Particularly Exposed
In Luxembourg, this inflationary chain reaction accelerates faster than elsewhere. Inflation rapidly feeds into labour costs due to the automatic wage indexation mechanism. In its February baseline scenario, published prior to the outbreak of the Middle East war, STATEC forecast inflation contained at 1.8% in 2026 and 20272, with the next wage indexation expected in Q2 2026, followed by another in Q3 2027. However, this scenario relied on an expected easing of energy prices, with oil around USD 60 per barrel in 2026 (versus USD 108 today) and lower electricity and gas tariffs. In other words, the forecast is built on assumptions now completely contradicted by current developments. STATEC had also modelled an alternative scenario involving rising energy prices: oil at USD 77 in 2026 and USD 87 in 2027, and gas above EUR 100 per MWh. In that case, inflation would reach 2.5% in 2026 and 2.4% in 2027, with wage indexation occurring one quarter earlier in 2027.
Within a single year, Luxembourg’s productive fabric would thus face two additional 2.5% increases in labour costs, after already absorbing five indexations in four years, regardless of productivity gains. The Chamber of Commerce has previously formulated concrete proposals to reform the mechanism through three pillars: economic (no more than one indexation per year), social (modulating indexation according to income), and environmental (including a more sustainable consumption basket)3.
Potential Stagflation and a Difficult Socio-Economic Context
On top of this dynamic comes another tension point: the debate on adjusting the minimum social wage, now framed by the EU Directive on Adequate Minimum Wages. The Directive does not impose automatic increases but requires Member States to implement structured evaluation and updating procedures based on adequacy criteria4.
In this context, the Government’s decision to increase the minimum social wage by 3.8% on 1 January 2027 raises questions. Luxembourg already has one of the highest minimum wages in Europe. This increase will occur just as the economy faces the return of inflationary pressures and a slowdown. According to STATEC’s latest estimate, growth stood at 0.6% in 2025, the fourth consecutive year below 1%. This stagnation is reflected in rising unemployment (6.3%) and a significant slowdown in job creation and investment.
The macroeconomic landscape is approaching stagflation, driven by cumulative effects: imported inflation raising costs, wage indexation spreading inflation across the economy, and an administrative increase in the minimum wage adding another layer. Individually, each mechanism may have merit. Combined, they generate a significant rise in labour costs disconnected from productivity, weighing on competitiveness, business profitability, investment decisions, and ultimately employment.
Anticipating Responses to the Crisis
This situation is even more worrying as public finances were already under pressure before this new geopolitical shock emerged. With rapidly rising public spending and a slowing economy, any further deterioration could tighten budgetary margins. Meanwhile, monetary conditions are likely to remain restrictive. A rise in interest rates, necessary to contain inflation, risks weighing on investment and complicating any recovery.
More than ever, prudence is essential. The issue extends beyond minimum wage policy alone. It concerns Luxembourg’s ability to reconcile legitimate social objectives with the constraints of an open economy. That is why the swift convening of a tripartite meeting has become a strategic necessity, not as a mere institutional reflex, but as the only forum capable of collectively anticipating the effects of this storm and crafting responses commensurate with its severity.
This crisis does not undermine the Government’s ambition to make 2026 the year of competitiveness : it reinforces its urgency, even as it makes the goal dramatically harder to achieve. Faced with unprecedented challenges that test the foundations of our economic and social model, and the conditions for financing it, proactive approaches and innovative solutions are no longer optional. They are essential. Time is short, and the cost of inaction would be far greater than the cost of boldness.