ECB inflation outlook points to prolonged euro zone price pressures

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Highlights

ECB's Survey of Professional Forecasters revises 2023 euro zone inflation forecast up to 3.0% from 2.7% and 2024 to 2.6% from 2.2%.
New projections show surging energy costs as primary driver, with inflation running nearly double ECB's target and possibly rising further.
Wage growth expected to slow from 3.3% in 2023 to 2.8% by 2028, reducing risk of a wage-price spiral and persistent domestic inflation.

Revised ECB survey signals higher inflation path

As reported by Reuters, citing the European Central Bank's Survey of Professional Forecasters, inflation in the euro zone is expected to average 3.0% this year, up from an earlier forecast of 2.7%, while next year's projection rises to 2.6% from 2.2%. The survey says inflation has surged to nearly twice the ECB's goal last month and could climb further because of sharply higher energy costs.

Underlying price pressures appear more contained. Core inflation, which excludes food and energy costs, is seen averaging 2.4% this year and 2.5% next year, but it remains above the ECB's 2% goal even in 2028.

Rate outlook and wage trends in focus

The updated inflation path is likely to keep pressure on policymakers as they weigh another interest rate increase in December after opting to hold rates on Thursday. The survey suggests much of the latest increase comes from energy costs, which are now estimated to be between the ECB's adverse and severe scenarios.

Forecasters do not expect elevated inflation to trigger a wage-price spiral. Wage growth is seen slowing from 3.3% this year to 3.1% next year and 2.8% in 2028, a trend that may offer some reassurance to policymakers concerned about second-round inflation effects.

The ECB has long argued that wage growth of around 3% is compatible with its inflation objective, assuming normal productivity gains. That means the wage outlook, while still elevated, does not yet point to the kind of persistent domestic inflation pressure that would complicate the bank's policy response further.

Mario Draghi’s warning on the risks of overly restrictive monetary policy outlined how keeping interest rates above growth for too long can worsen debt dynamics and fuel pressure for higher inflation. Our publication previously noted his argument that central banks should still prioritize price stability, but aim for the lowest rate path consistent with the inflation target to limit damage to investment, productivity, and long-term growth.

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