Eurozone Inflation Revised Upwards Amid Energy Price Shock

Rabobank strategists Bas van Geffen and Elwin de Groot have revised their Eurozone inflation forecasts in response to sharply higher oil and natural gas prices. The energy shock is expected to lift headline Eurozone inflation by about 0.5 percentage points in 2026 and 2027, with a peak of 4.4% year-on-year inflation in early 2027.

While the direct effects of higher energy prices on headline inflation are evident, core inflation is only modestly higher, increasing by around 0.1 percentage point. The ECB's deposit rate will likely remain near 2.50% until at least 2028 due to sluggish disinflation.

As a result of the revised forecasts, there is an increased risk that employees may demand higher pay increases in response to the loss of purchasing power caused by high inflation and energy prices. The economists warn that with inflation likely to peak around 4.5% early next year, this risk cannot be ignored.