Euro Area: Inflation durably under 2%? A framework based on the Bernanke-Blanchard model

Amid a sustained decrease in energy prices, euro area Inflation has stabilized around 2% since May , but underlying inflation remains above its pre-Covid average , particularly in the services sector. The Bernanke-Blanchard model provides a theoretical framework for analyzing inflation . When adjusted to the euro area, it allows for a precise analysis of past shocks — notably identifying the role of supply shocks during the inflation surge in 2021—and enables forecasts of inflation and negotiated wages. The model predicts euro area inflation to be around 2% by the end of 2025, and slightly below 2% in 2026 , in line with our Mid-Year Outlook projections (2.0% in 2025 and 1. 9 % in 2026) . Negotiated wages are projected to keep decreasing, yet they will remain more dynamic than before the pandemic. Thus, we anticipate a "pause" during the next ECB Governing Council meeting in July before a final rate cut of 25 bp to 1.75% at the September meeting . From July 2025 onwards, we produce our in-depth analyses for the EMEA region every Thursday through our Special Report series. We will continue to react to economic events with our other publications . The EMEA Macro Research Team