Differences in service inflation are themselves largely due to wage dynamics (Chart 6.b). In Germany, with infrequent wage negotiations, wages are late in catching up with past inflation, compared to France, with annual negotiations and an indexed minimum wage. Once the catching-up is over in each country, we can hope we will see an evolution towards lower inflation rates in the services sector in the euro area.
These apparently stable inflation data are surrounded by significant risks on the inflation outlook.
This is the present paradox: stable data, but significant risks. There are upside risks on inflation, such as global value chain fragmentation, and public spending in defence and infrastructure in Germany. There are downside risks as well: a greater deceleration of wage growth, a stronger euro, and cheaper imports from China. Over the latest six months this year compared to the same period last year (May-to-October 2025 vs 2024), Chinese imports in the euro area increased by 11% in volume, and their price decreased by 9%. To give an order of magnitude, the last two phenomena could reduce inflation by about 0.2 percentage point in 2027 according to Banque de France estimates. The postponement of ETS2 to 2028, voted by the European Parliament, will also post-pone its inflationary impact of around a 1/4 of percentage point from 2027 to 2028. To these “traditional” downside risks, we should add a systemic “Knightian” one with financial instability due to global equity market valuations, private credit and high government debts. Furthermore, this financial instability could be triggered by the attacks to the credibility and independence of the Fed.
Bottom line: (i) the downside risks on the inflation outlook remain at least as significant as the upside risks, and we would not tolerate a lasting undershooting of our inflation target; (ii) the name of the game for our future meetings remains full optionality. The only fixed figure is our 2% inflation target; it is not any terminal interest rate, and we don’t exclude any policy action.
In the battle to reach the inflation target, we have finally taken the lead, and this is no small achievement. But being ahead doesn’t give us permission to relax. As the French tennis champion René Lacoste used to say: “If you’re on the cusp of winning, remember that there is no opponent who plays better than an opponent who is about to lose”. As in a tennis match, it’s not the last shot that matters, it is the next one. We must not stay fixed on the court and should anticipate how the game could evolve. In other words, agility is at the crossroads of two other virtues: extreme clarity about our determination to deliver the 2% inflation target; pragmatic humility and optionality about our next shots to that end.
i In October 2022 the year-on-year HICP Inflation rate reached the peak level of 10.6% in the Euro Area. In May 2025, inflation was 1.9% and never went below 1.9% or above 2.2% since.
ii Brainard (W.C.) (1967), “Uncertainty and the Effectiveness of Policy”, The American Economic Review, Vol. 57 Issue 2, Papers and Proceedings of the Seventy-Ninth Annual Meeting of the AER, 411-425, May
iii Bernanke (B.S.) (2007), “Monetary Policy under Uncertainty”, speech at the 32nd Annual Economic Policy conference, Federal Reserve Bank of Saint Louis, 19 October; Bauer (M.) et al. (2025), “Accounting for Uncertainty and Risks in Monetary Policy”, Finance and Economics Discussion Series 2025-073, Board of Governors of the Federal Reserve System.
iv Lhuissier (S.) (2026), forthcoming.
v Pill (H.) (2025), “Evolving UK monetary policy in an evolving world”, speech at the Institute of Chartered Accountants of England and Wales annual conference, London, 17 October
vi Bauer (M.D.), Pflueger (C.E.), Sunderam (A.) (2024), “Perceptions about Monetary Policy”, The Quarterly Journal of Economics, Vol. 139, Issue 4, 4 November, Swanson (E.T.), Williams (J.C.) (2014), “Measuring the Effect of the Zero Lower Bound on Medium and Longer-Term Interest Rates”, The American Economic Review, Vol. 104, No. 10, pp. 3154-85, October.
vii Villeroy de Galhau (F.) (2024), “Monetary Policy in Perspective (II) : Three landmarks for a future of “Great Volatility””, speech at the London School of Economics, London, 30 October
viii Lagarde (C.) (2025), “From resilience to strength : unleashing Europe’s domestic market”, speech at the 35th Frankfurt European Banking Congress, Frankfurt am Main, 21 November
ix Villeroy de Galhau (F.) (2024), “Monetary Policy in Perspective (II) : Three landmarks for a future of “Great Volatility””, speech at the London School of Economics, London, 30 October
x Schnabel (I.) (2025), “Towards a new Eurosystem balance sheet”, speech at the ECB Conference on Money Markets 2025, Frankfurt am Main, 6 November