Europe entered 2026 expecting inflation to continue gradually declining after several years of monetary tightening and slowing economic growth. The latest data released this week complicated that expectation. Spain’s EU-harmonized inflation rate rose to 3.6% in May, while Italy’s equivalent figure climbed to 3.3%, both moving further above the European Central Bank’s 2% target. The increases followed eurozone inflation reaching 3.0% in April, according to Eurostat data, and reinforced concerns that rising energy costs are beginning to feed more broadly into the economy.
The primary driver remains energy. Oil markets have experienced renewed volatility because of instability in the Middle East, pushing fuel and transportation costs higher across Europe. Policymakers increasingly worry about so-called second-round effects, where temporary energy shocks eventually influence wages, services, and consumer expectations. Bank of Portugal Governor Alvaro Santos Pereira warned this week that inflation must be addressed before those broader effects become entrenched.
The challenge for the ECB is that inflation is accelerating while economic momentum remains weak. Recent purchasing manager surveys showed eurozone private-sector activity contracting for a second consecutive month. According to S&P Global data reported by Reuters, the eurozone composite PMI fell to 47.5 in May, its lowest reading since late 2023. Any reading below 50 indicates economic contraction.
That combination places the ECB in an uncomfortable position. Additional rate hikes may be necessary to contain inflation, yet tighter financial conditions could further weaken investment, industrial activity, and consumer demand. The European Commission recently downgraded its 2026 eurozone growth forecast to 0.9%, reflecting how energy prices and geopolitical uncertainty continue weighing on economic performance.
Germany remains particularly exposed because of its industrial structure and export dependence. Southern European economies have benefited more from tourism and services demand, creating uneven growth patterns across the region. At the same time, labor markets remain relatively resilient, limiting the speed at which inflationary pressures can dissipate naturally.
The ECB spent much of the past year preparing for eventual normalization. The latest inflation data suggest policymakers may instead remain focused on containment. Europe avoided recession, but price stability remains unresolved. That distinction increasingly defines the region’s economic outlook heading into the second half of the year.