ECB raises inflation forecast: ECB Chief calls for more investment in AI

Yesterday, during a hearing of the European Parliament’s Committee on Economic and Monetary Affairs, European Central Bank President Christine Lagarde presented latest ECB’s inflation outlook, with inflation the outlook showing inflation going even higher and expected to remain above 2% until 2029.

According to the ECB’s latest September projections, headline inflation is expected to average 3% in 2026, 2.5% in 2027 and 2.1% in 2028. Core inflation, which excludes energy and food, is projected at 2.5% this year, 2.6% in 2027 and 2.3% in 2028.

The outlook has been steadily pushed higher as the impact of higher energy prices has continued to feed into the European economy. The ECB had already raised its 2026 inflation forecast to 3% in June. Compared with the ECB’s June forecasts, the 2026 headline inflation projection remains unchanged at 3%, but the forecast for 2027 has been raised from 2.3% to 2.5%, while the 2028 forecast has been raised from 2.0% to 2.1%.

President Lagarde said headline inflation reached 3.2% in August, up from 2.9% in July, with energy inflation rising sharply to 14.3%. Inflation excluding energy and food eased slightly to 2.4%. At the beginning of September the flash estimate had put August inflation at 3.3%, compared with 2.9% in July. The final figure was subsequently revised down marginally to 3.2%. Euro-area inflation had increased to 2.9% in July, after temporarily easing during the previous month.

The ECB raised its three key interest rates by 25 basis points in June, following the energy and supply shock generated by the war in the Middle East, and tightened monetary policy again in September, with the main refinancing rate at 2.65% and the marginal lending facility stands at 2.90%.

The ECB’s inflation outlook is increasingly similar to that of the US Federal Reserve, which has also been revising its inflation forecasts upwards. The Federal Reserve raised interest rates by 0.25 percentage points on 16 September, bringing the federal funds target range to 3.75%-4.00%.

The Fed also raised its forecast for PCE inflation in 2026 from 3.6% in June to 3.7%, while its 2028 forecast increased from 2.0% to 2.1%. The Federal Reserve now expects inflation to reach its 2% target in 2029.

However, the main focus of President Lagarde’s speech yesterday, was on artificial intelligence and its potential impact on European productivity, investment, employment and inflation.

President Lagarde said that AI has the potential to sustain and increase economic growth in Europe, but warned that its benefits will depend heavily on investment and the speed at which European firms adopt the technology.

There are already promising signs she said as she stated that around 38% of Euro-area firms reported at least moderate use of AI by late 2025, although only 7% said they were using it significantly. More than 50% of workers already use AI in their jobs.

European companies are also directing increasing amounts of capital towards AI. President Lagarde said firms are expected to devote around 10% of their total investment to AI during 2026, while AI-related borrowing already accounts for roughly one quarter of the growth in lending to companies.

However, Europe still trails the United States in AI investment.

She added that the EU’s planned €30 billion investment in AI Gigafactories is “a good start”, but substantially more investment will be required in computing power, data centres, energy infrastructure and employee training.

ECB estimates suggest that, under a scenario of rapid and widespread adoption, AI could increase Euro-area productivity growth by around 0.3 to 0.4% per year over the coming decade. If adoption remains slower, the productivity benefit could be roughly half as large.

Higher productivity could eventually reduce inflationary pressure by allowing companies to produce more at lower cost. In the shorter term, however, large amounts of AI investment could increase demand for capital, energy, computing infrastructure and skilled labour, meaning its overall impact on inflation remains uncertain.

President Lagarde also warned that the employment effects remain unclear. Companies using AI primarily for research, innovation and developing new products are currently more likely to hire additional workers, while companies deploying AI mainly to reduce labour costs are more likely to cut employment.

She argued that Europe therefore needs to do more than simply encourage adoption. The EU needs deeper capital markets, more computing capacity, cheaper and more abundant energy, better access to skills and less fragmentation in the Single Market.

AI adoption must also spread beyond a relatively small number of leading technology companies, while workers will require substantially greater access to retraining as AI changes the skills demanded by employers.

President Lagarde said Europe must simultaneously develop greater technological independence, particularly in critical parts of the AI supply chain, while remaining connected to the global technology economy.

The objective, she stressed, is not complete technological self-sufficiency, but ensuring that Europe retains the ability to operate critical systems independently under adverse circumstances.

You can view her full speech here.