The key is not only to reduce current inflation, but also to prevent long-term expectations from becoming unanchored. If businesses and households anticipate persistently high inflation, they will tend to adjust prices and wages upwards, generating a spiral that will be difficult to control.

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Anatomy of inflation

The inflation forecast for 2026 has been revised upwards to 2.6% mainly due to the conflict in the Middle East. The ECB is monitoring two levels of contagion:

• Indirect effects: Higher energy costs are passed on to other goods and services (core inflation, which excludes energy and food, is estimated at 2.3% by 2026).
• Second-round effects: The risk that rising energy prices will lead to excessive wage hikes which, in turn, will feed back into inflation. For now, growth in compensation per employee has slowed to 3.7% (from 4.0%), which gives the ECB some room for confidence.

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Growth prospects

Although they have revised growth for 2026 downward (only 0.9%), the ECB identifies pillars of support that prevent a deep recession:

• Private consumption: Driven by a strong labor market with historically low unemployment levels.
• Public and strategic investment: Government spending on defense and infrastructure, along with business investment in digitization and R&D, are offsetting weak exports.

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Alternative scenarios

Given the volatility of oil and gas supply, the ECB is not relying on its “baseline scenario” alone. They have analyzed alternative scenarios where a prolonged disruption of energy supply would raise inflation higher than expected and reduce growth further.

1. The “protracted disruption” scenario.

The main alternative scenario analyzed contemplates a prolonged and severe disruption of oil and gas supply. In this case, the results for the economy would be worse than in the baseline scenario.

This would occur in case of:

• Contagion to other prices: The increase in the cost of energy is massively passed on to the prices of other products and services (not only gasoline or light).
• Wage-price spiral: Workers demand much higher wage increases to compensate for the loss of purchasing power, which forces companies to raise prices again, creating an inflationary loop.
• Supply chains: If war disrupts global trade routes more broadly, causing shortages of raw materials.

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The “optimistic” scenario

Although the ECB focuses on negative risks, they also mention a scenario where things could go better than expected if:

• Short-lived conflict: The economic repercussions of the war in the Middle East are proving to be more short-lived than currently expected.
• Technology and investment boost: Spending on defense, infrastructure and the adoption of new technologies by European companies drives growth more than estimated.