Persistent Inflation Exceeding 3% Projected for 2025 and Beyond
The European Central Bank (ECB) has released its latest inflation forecast for Germany, predicting that headline inflation will average around 1.7% in 2026, with a slight increase to 1.9% when food and energy are excluded. The forecast assumes that geopolitical tensions do not deteriorate.
The ECB's projection suggests a medium-term stabilization near the 2% target, although uncertainties remain, and a data-dependent policy stance will be maintained. Different scenarios for inflation forecasts by the ECB indicate a range close to the target, reflecting modest growth and ongoing monitoring of risks.
Under all three scenarios - medium, high, and very high - inflation remains above 3% until March 2026. The "low" scenario assumes inflation each month is equivalent to 1% per annum (0.08% per calendar month), while the "high" scenario assumes 3% per annum (0.25% per calendar month). The "medium" scenario falls between these two, with new inflation each month equivalent to 2% per annum or 0.17% per calendar month.
The "very high" scenario, however, assumes that the new inflation each month is equivalent to 5% per annum (0.4% per calendar month). Even with the "low" scenario, inflation remains above two percent over the same period and above 3% until November 2025.
In the UK, annual CPI Inflation rose from 3.6% in June to 3.8% in July 2025, with goods price inflation increasing from 2.4% to 2.7%. Services annual inflation has risen to 5.0% from 4.7%, and core inflation (CPI excluding food and energy) has risen slightly to 3.8% from 3.7%.
The biggest contributors to the changes in headline inflation between June and July were Transport (0.21 percentage points), Restaurants and Hotels (0.11 percentage points), Food and Non-Alcoholic Beverages (0.05 percentage points), and Miscellaneous Goods and Services (-0.04 percentage points).
The latest ONS data on wages (April to June 2025) shows annual inflation for regular earnings remaining stubbornly high at 5.0%. The direct effects of Tariffs on UK inflation are considered minor, but adverse effects on particular supply chains in Britain from the US-China trade war are possible.
Professor Huw Dixon, the author of the article, further analyses the situation in various articles, including the NIESR CPI Tracker, Economics Observatory articles on the return of UK inflation to the Bank of England's target, the impact of inflation on the economy when interest rates are near zero, the effect of rising energy prices on the UK economy, and the NIESR Economic Outlook.
This article is related to Macro-Economic Modelling and Forecasting. For more in-depth analysis, readers are encouraged to refer to these resources.
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