ECB projects eurozone inflation above 2% target until mid-2027 as energy costs rise

Energy costs drive inflation timeline

The European Central Bank stated in its economic bulletin on 24 September 2026 that headline inflation across the eurozone will remain well above the 2% target until the first half of 2027. Ongoing conflicts in the Middle East and Ukraine drove energy prices higher throughout the summer, with energy price inflation accelerating from 10.3% in July to 14.3% in August. Substantial contributions from liquid fuel refining margins intensified the price pressure across European retail markets. Fuel data compiled by Agence France-Presse from European Commission records dating back to 2005 showed average diesel prices in the European Union reached 2.23 euros per litre, climbing from 2.16 euros the preceding week. The fuel price increase set record levels across 19 European Union member nations, including Germany, France, and Italy.

The central bank expects the energy component to reverse course later in the cycle, turning negative through mid-2028 and driving down headline price figures.

This is likely to keep headline inflation well above the target until the first half of 2027.

Core inflation and price pass-through

Headline inflation is anticipated to converge back toward the 2% target near the end of 2027, driven by higher monetary policy interest rates. Increased energy costs are expected to transmit gradually into processed food and the broader non-energy industrial goods sectors. Core inflation, which strips out volatile energy and food components, is projected to average 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028. Stronger economic activity across the bloc is also projected to generate modest upward pressure on underlying prices. Core inflation will continue to rise into early 2027, remain elevated for the rest of that year, and moderate in 2028.

Labor costs and corporate profits

During the second quarter of 2026, labor cost growth per employee rose at an annual rate of 3.3%, moderating from 3.5% in the first quarter during the height of the energy shock. Increased worker productivity helped curb the growth rate of unit labor costs, which dropped from 3.5% in the opening quarter to 2.6% in the second quarter. In contrast, unit profit growth widened from 0.3% in the first quarter to 2.2% in the second quarter. Forward-looking data from the ECB wage index indicates contractual wage growth will experience a modest acceleration to 2.7% in the first half of 2027.

Economic growth and monetary policy

Economic growth across the eurozone proved more resilient than earlier projections indicated, with momentum carrying into the third quarter of 2026. The central bank revised its gross domestic product growth expectations upward to 0.9% for 2026 and 1.4% for 2027, while leaving its 2028 forecast unchanged at 1.5%. Despite this improved resilience, policymakers emphasized that macroeconomic risks remain skewed, citing upside risks for consumer prices and downside risks for output. In response to these conditions, the Governing Council lifted its key interest rate to 2.5% on 10 September.

The outlook remains highly uncertain, with upside risks to inflation and downside risks to economic growth.