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Eurozone inflation is set to fall below the European Central Bank’s (ECB) target next year due to the knock-on effects of US trade policy, according to the European Commission’s spring economic forecast released this Monday.
Consumer-price growth is expected to ease to the ECB’s 2% goal by mid-2025 and average just 1.7% in 2026. The EU’s executive arm cited lower energy prices, the diversion of Chinese exports, and a stronger euro as “clearly negative” forces driving inflation down.
“Inflation is declining faster than previously forecast and is on track to reach the 2% target this year,” European economy commissioner Valdis Dombrovskis said. “But we cannot be complacent. The risks to the outlook remain tilted to the downside, so the EU must take decisive action to boost our competitiveness.”
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Brussels also gave a slightly brighter forecast for economic growth. It sees eurozone GDP expanding by 1.4% in 2026, up from 0.9% in 2025 — a more optimistic view than those set out by the ECB in March and the International Monetary Fund (IMF) in April. While uncertainty continues to weigh on domestic demand, labour markets are expected to remain resilient.
The Commission’s projections assume US tariffs on most EU imports stay at 10%. The baseline also assumes that 25% tariffs will continue to apply to automobiles, steel and aluminium, with pharmaceuticals and microprocessors exempt.
Still, the Commission acknowledged that policy uncertainty remains high. Most eurozone exports to the US are subject to the 10% tariff during this negotiation period, and Brussels has drawn up a list of counter-tariffs should talks fail.
“Given the magnitude of these flows, this is set to markedly increase competitive pressures in consumer goods markets across the EU,” the Commission said. Combined with the appreciation of the euro, it expects goods inflation to drop to nearly 0% in the euro area.
By contrast, services inflation remains elevated, driven by solid wage growth. It is projected to slow “only gradually” to 2.5% by the end of 2026.
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The European Commission also downgraded its export growth forecast for the EU in 2025 to 0.7%, down from 2.2% in its previous estimate from November.
Meanwhile, the EU unemployment rate is expected to fall to 5.9% in 2025 and reach a “historic low” of 5.7% in 2026.
The ECB will release its next set of quarterly forecasts alongside its interest rate decision on 5 June. Investors widely expect another cut in borrowing costs, with many policymakers expecting US tariffs to put downward pressure on prices.