ECB Chief Economist Philip Lane provided insight into the central bank’s inflation expectations in a speech today. In the near term, headline inflation is anticipated to fluctuate, with a temporary dip in September followed by a rebound later this year.
But more significantly, ECB projects a “rapid decline” in inflation over the next two years, from 2.6% in Q4 2024 to 2.0% in Q4 2025. Core inflation, which is primarily driven by services, is expected to follow a “even sharper” drop, falling from 2.9% at the end of this year to 2.1% by the same period in 2025.
The projections align with weaker economic growth and declining wage pressures, both of which are expected to accelerate the disinflationary process throughout 2025. Lane noted that this slowdown in wage growth is consistent with the recent data, reflecting the end of the “catch-up” dynamics seen in recent years. Additionally, the disinflation process will be supported by well-anchored forward-looking inflation expectations, with reduced price-price and price-wage dynamics compared to the higher inflation environment of 2023.
Looking forward, Lane emphasized that a “gradual approach” in reducing policy restrictiveness will be appropriate, provided the data aligns with ECB’s baseline projection. However, he cautioned that the central bank will “retain optionality” about the pace of adjustment, indicating flexibility depending on future economic developments.
