ECB Expects Energy Shock to Keep Inflation High Until 2027
Philip R. Lane states that a second wave of price increases will keep inflation elevated before it falls to target in mid-2027.
Key points
- ECB board member Philip R. Lane states that inflation will stay above target until mid-2027.
- A second wave of oil and gas price increases has invalidated the earlier June stabilization forecast.
- German and EU government spending supports economic growth, but the energy shock remains the main risk.
The European Central Bank now expects inflation to remain higher for longer due to renewed energy price spikes. ECB board member Philip R. Lane confirmed that the energy shock will last past the initial June peak. This shift pushes the return to the two percent target back to mid-2027.
Markets had assumed prices would stabilize after the US and Iran signed a memorandum in June. However, the conflict continued and triggered a second wave of rising costs for oil and gas. Lane noted that this development invalidates the earlier forecast of a quick recovery in the second half of the year.
Energy costs drive broader price pressure
So far, the inflation spike has not significantly increased prices for non-energy goods and services. Lane explained that service sector costs have remained contained between February and September. The bank now anticipates upward pressure on food, electricity, and general goods as the shock persists.
Government spending supports economic resilience
The European economy remains resilient despite the energy crisis. Lane cited German infrastructure and defense spending as key positive factors for growth. He also pointed to the Next Generation EU program as a source of stable funding that supports demand without creating immediate debt risks.
The central bank baseline assumes the economy will grow at a steady but modest pace. This projection holds only if the energy shock does not become more severe this autumn. Lane warned that a larger and more persistent shock would directly hold back economic activity.
Uncertainty surrounds the crisis resolution timeline
Lack of political clarity makes it difficult to predict when the crisis will end. Lane stated that the bank relies on market prices for oil and gas to gauge the timeline. These financial instruments currently point to a resolution later this year, though the exact date remains uncertain.
The bank expects the situation to improve but not return to pre-crisis normalcy. Lane noted that artificial intelligence will provide a long-term positive effect on living standards. However, he acknowledged that specific occupations may suffer from these structural technological changes.
