Decomposing Eurozone 2025 inflation

Country-level breakdown of HICP reveals an unusual source of Eurozone inflation persistence

• Country-level HICP forecasts for 2025 reveal that four-fifths of the Eurozone overshoot from 2% is driven by German HICP;

• This would be an new phase for the currency area as German inflation has typically been too low;

• Then again, this might only reveal the politics of forecasting at the ECB.

AS INFLATION has now peaked, it is logical that inflation forecast targeting central banks shift focus onto medium-term inflation dynamics in setting policy. It is therefore worth noting data published last week showing the country-level forecasts that underlie the Eurozone aggregate (headline) HICP forecasts. And it is sobering to note that inflation in 2025 is largely driven by one unusual source: Germany.

Decomposing HICP

On the assumption that energy and food are roughly a wash by 2025, the 2025 projection provides a good approximation of the drivers of core HICP at that time (Eurozone forecast of 2.3% for core versus headline of 2.2%.)