Euro Area Inflation to Stay Above Target Beyond 2027, ECB Hikes Expected

Societe Generale economists predict that Euro area inflation will remain above target beyond 2027, with headline inflation projected to peak near 3.7-3.8% and core around 2.7-2.8%. The forecast comes as the European Central Bank (ECB) is expected to hike rates this week and again in December due to resilient economic activity and energy-related pressures.

The economists point to the recent August flash euro area inflation reading, which rose 0.4 percentage points to 3.3% year-over-year, as the strongest since late 2023. They expect headline inflation to peak at around 3.7-3.8% in early 2027, while core inflation is expected to peak at around 2.7-2.8% in mid-2027.

The upward pressure on inflation is attributed to resilient economic activity, strong global AI demand, and transport and food-related supply concerns due to heatwaves, war, and the upcoming super-El Niño. As a result, the economists argue that inflation will stay above target for longer, not returning to price stability until beyond 2027.