Current consensus expectations see eurozone headline CPI at 1.8% and core CPI at 2% in 2026. We suspect inflation risks are tilted to the upside from here given the recovery in our eurozone growth leading indicators and the ECB rate cuts so far this year.
Our main eurozone inflation leading indicator is rolling over from a high level, but the point estimate remains elevated at 2.8%. Core and supercore CPI have also been slower to fall, still at 2.3 to 2.5% YoY.
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Our estimate of the real neutral rate (R*) for the eurozone is at 0.8%, which is also where the 5y5y EUR real OIS is trading, a proxy for market-implied R*. This is near the higher end of the ECB’s estimated range of -0.5% to 1% (link).
With headline CPI at 2%, there is good chance that ECB policy is already stimulatory, potentially creating inflation upside in 2026. We are taking profits on our SOFR vs Euribor Dec 25/26 convergence trade established last month.
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