ECB sees inflation staying high as energy prices rise

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ECB sees inflation staying high

Highlights

Higher energy prices could keep euro-area inflation elevated longer.
ECB inflation is projected at 3% in 2026.
Euro-area growth remains resilient despite the energy shock.

Lane said the latest energy shock was broader than the initial increase in oil prices, with natural gas costs also rising, according to Bloomberg. He expects the effects to reach electricity, food, and manufactured goods, while inflation in services should remain comparatively contained.

Energy keeps inflation above target

The assessment reinforces the ECB’s September projections, which put average headline inflation at 3% in 2026 and 2.5% in 2027, before easing to 2.1% in 2028. Inflation is expected to peak at 3.6% in the final quarter of 2026 as higher energy costs work through the economy.

The ECB has already responded to persistent price pressure. Earlier this month, the Governing Council raised its three key interest rates by 25 basis points, taking the deposit facility rate to 2.5%. Policymakers said inflation was likely to remain well above the 2% target for an extended period and stressed that future decisions would depend on incoming economic data rather than a predetermined rate path.

Growth faces a difficult balance

Higher oil and gas prices create a difficult situation because they can simultaneously push up consumer prices and weaken economic activity. More expensive electricity, heating, and transportation can squeeze household purchasing power while increasing operating costs for businesses.

For now, the euro-area economy has held up better than previously expected. The ECB projects GDP growth of 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. Public investment, a resilient labor market, and spending on infrastructure, defense, and artificial intelligence are expected to provide support.

Lane indicated that this outlook depends heavily on the severity and duration of the energy shock. A more persistent increase in prices would weaken growth, while a less severe episode would leave domestic investment and public spending with greater room to support activity.

The central challenge for the ECB is therefore shifting from the immediate energy-price jump to its broader economic effects. If elevated costs continue feeding into food and goods, inflation could remain above target even after energy markets stabilize. That prospect increases the importance of upcoming inflation data as policymakers determine how restrictive monetary policy needs to remain.

We also reported ECB signals further rate hikes as energy risks threaten the inflation outlook.

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