Key Takeaways
- Eurozone inflation is expected to rise to around 3% in April, driven by energy, while core inflation remains broadly stable for now.
- Price pressures are likely to build through 2026, with inflation seen peaking later in the year as energy costs feed through with a lag.
- The European Central Bank is expected to hold rates in April, but markets now price in up to two rate hikes later this year.
Eurozone inflation is forecast to come in well above the European Central Bank’s target this month, according to preliminary consumer price data due this Thursday.
At 3%, consensus economist estimates compiled by FactSet exceed both Eurostat’s final inflation reading of 2.6% for March and the ECB’s medium-term inflation target of 2%.
Core inflation—which excludes volatile components such as energy and food—is expected to remain stable at around 2.3%, suggesting underlying prices have yet to react to the recent energy shock.
“The surge in energy prices in light of the ongoing conflict in the Middle East has had a notable impact on our headline inflation forecast, with a more limited pass-through into our core inflation projection,” Goldman Sachs analysts say. The bank expects year-over-year energy inflation to increase to 10.7% from 5.1% in March, although uncertainty remains high.
But analysts warn that the real test lies in the coming months, when second-round effects, where inflation is passed on to consumers demanding higher wages to compensate for rising prices, could complicate the ECB’s policy path.
“There is typically a lag of several months before higher energy prices fully feed into inflation, meaning both headline and core inflation could remain relatively contained in the near term,” says Michael Field, Morningstar’s chief European markets strategist.
“These effects are likely to become visible only over the coming months and will depend on how long energy prices remain elevated,” he adds.
Morningstar analysts have increased Brent oil price expectations to USD 85 a barrel for 2026 and USD 76 a barrel for 2027, up from USD 65 previously.
What Is the Inflation Outlook for 2026?
The bigger shift, however, lies in the outlook for the rest of 2026. What once looked like a steady disinflation trend has turned into a more uncertain outlook shaped by geopolitical tensions, volatile energy prices, and weakening growth signals across the euro area.
“In the short term, inflation data for April may look somewhat more subdued. Starting in May, however, we expect to see further upward pressure,” says Martin Moryson, global head of economics at DWS. “The actual rise driven by high energy prices will come later: We expect a peak of around 3.5% in late summer, before headline inflation gradually recedes again—primarily due to base effects,” he says.
Services inflation remains persistent at 3.2% in March, while goods inflation is still subdued at 0.5%, suggesting limited pass-through so far—but this is likely to change as higher energy costs ripple through the economy.
Goldman Sachs expects headline inflation to average around 2.8% for 2026, with a peak of 3.2% in the second quarter, before easing again in 2027 to an average of 2.1%. However, much depends on how persistent energy prices prove to be.
Is Europe Heading for Stagflation?
Concerns about stagflation—the combination of rising inflation and weakening growth—are increasing as economic data deteriorate. Recent purchasing managers’ index data show clear weakness across much of the continent, according to Deutsche Bank Research. The euro area composite PMI fell to 48.6, signaling contraction and marking a 17-month low. “So that confirmed fears that Europe was headed for a more obvious stagflationary hit from the rise in energy prices,” the analysts say.
ECB staff revised their economic growth projections for the eurozone to:
- 0.9% in 2026 (down from 1.2% in its December forecast)
- 1.3% in 2027 (down from 1.4%)
- 1.4% in 2028 (unchanged)
DWS’s Moryson adds that Europe is better positioned to handle energy shortages than during the 2022 crisis, thanks to diversified gas supplies and expanded LNG capacity—but prices are still set on global markets.
“For Western economies, the Iran war is currently more a matter of prices than growth, as we do not expect physical shortages in energy supply. The energy intensity of production has fallen dramatically—today, we consume only about a quarter of the oil per unit of real GDP compared with 1965. This makes economies significantly more resilient today,” he says.
Will the ECB Raise Interest Rates on Thursday?
This mix of slowing growth and rising prices is already feeding into market expectations. Futures markets where investors trade expectations for policy rates are currently pricing in up to two 25-basis-point hikes by the end of 2026, with a first move potentially as early as June and another later in the year.
“We expect the ECB to keep rates on hold at its April meeting, with the governing council maintaining a stance of vigilance amid exceptionally high uncertainty,” says Konstantin Veit, portfolio manager at Pimco.
“With risks to both growth and inflation elevated, policymakers are likely to place a high value on waiting for the next round of staff projections in June before making any policy adjustments.”
Veit expects the central bank to remain vigilant. “If the ECB were to respond to inflation risks, we believe any move would be measured rather than aggressive, with more than two rate hikes unlikely. Such an adjustment would be aimed primarily at managing inflation expectations rather than reacting mechanically to short‑term volatility, especially as growth momentum continues to soften.”
ECB President Christine Lagarde has already signaled caution, noting that the “double uncertainty” surrounding the duration and impact of the energy shock argues for waiting for more data before taking action.
