Extract A: Euro Area Harmonised Index of Consumer Prices (HICP) and Core Inflation, annual % change (quarterly)

Extract B: Headwinds for Euro Area Inflation

The European Central Bank (ECB) warns that inflation in the region is likely to remain elevated above its 2% target for an extended period. This surge is driven primarily by unprecedented increases in wholesale natural gas and oil prices, alongside persistent global supply chain bottlenecks.

Import prices have risen significantly, increasing the cost of raw materials and intermediate components for domestic firms. While many businesses initially absorbed these costs, they are increasingly passing them on to consumers to protect their operating margins. Furthermore, there are growing risks of second-round effects, as workers demand higher nominal wage awards to mitigate the cost-of-living squeeze, potentially triggering a wage-price loop. In the longer term, the ECB anticipates inflation will drift back down towards the target once aggregate demand trends cool back to long-run potential capacity.

Extract C: Policy Actions to Secure Stability

The implementation of decisive monetary policy is essential to anchor inflation expectations and prevent high inflation from becoming structural. This policy approach must be coordinated with fiscal prudence to ensure aggregate demand is not unnecessarily simulated.

By raising policy interest rates, the central bank aims to increase the cost of borrowing and incentivise saving. This cools household spending and business investment, dampening domestic economic momentum. Over time, these actions should align growth in demand with the productive capacity of the economy, reducing domestic price pressures and stabilizing the exchange rate to lower the price of imported goods.