ECB May Hike Again in December, Yet Inflation Could Fall Below 2% by End of Next Year? AI Large Models Outline a Path of Cooling Inflation

Bloomberg Economics research shows that recent statements from European Central Bank officials suggest their views largely converge on expecting euro-area inflation to fall to a level "clearly below" 2% in a year's time. Economist Andrzej Sokol arrived at this conclusion. He used cutting-edge AI large models to analyze news headlines written from policymakers' speeches and interviews, and combined the results with a nonlinear forecasting tool. The results indicate that the impact of the Iran war will be temporary, and inflation will also be lower than the ECB's latest projections suggest. The chart above shows the inflation forecasts implied by news headlines about ECB officials' remarks. Source: Eurostat, Bloomberg Economics. ECB monetary policymakers judged almost unanimously last week that the risks to the inflation outlook are tilted to the upside. According to existing projections, inflation will average 3% this year and 2.5% in 2027. Although the ECB kept rates unchanged, officials are prepared to raise rates for the third time this year in December. "The ECB's deluge of communication contains signals about how policymakers see inflation risks evolving," Sokol wrote. "Our new AI model helps reveal these signals." According to his analysis, policymakers' remarks still point to inflation close to 4% in the fourth quarter. For 2027, these remarks imply that inflation will fall to 2.4% by mid-year and then further to 1.7%. This is broadly consistent with Bloomberg Economics' forecast report: the institution expects inflation to fall below 2% in the second half of 2027. Nearly 4% now, possibly 1.7% by the end of next year: how long will the energy shock last? The ECB may raise rates again in December, while euro-area inflation may still fall to 1.7% by the end of 2027. These two judgments are not contradictory: what the central bank must guard against now is energy price increases feeding into wage negotiations and corporate pricing; what the Bloomberg Economics research report found after using AI large models to analyze officials' speeches is another medium-term pathif energy prices do not continue to rise and wages do not follow suit, then even if oil and gas prices remain elevated, the upward effect of energy on year-on-year inflation will weaken as the comparison base rises. The ECB's own official September projection summary also expects this effect to fade, with the main disagreement being whether inflation will then return to around 2% or fall clearly below 2%. The latest data show why the central bank still dares not relax its vigilance. Euro-area inflation rose to 3.8% in September from 3.2% in August, with the year-on-year increase in energy prices widening to 18.9% from 14.3%, and the increase in services prices also rising to 3.2% from 3.0%. The economy is still expanding, but at a slower pace: real GDP grew 0.4% quarter on quarter in the third quarter, below the previous quarter's 0.6%; the October manufacturing purchasing managers' index fell to 52.7 from 52.9, still above the 50 boom-bust line. As of November 3, the euro area's October flash inflation estimate had not yet been released; a Reuters survey showed economists unanimously expect the reading to be released on November 4 to reach 4.0%. How many more hikes after December? Wages and bond yields offer two clues The ECB kept its deposit facility rate at 2.50% on October 29. ECB President Lagarde subsequently said that conditions at the time were already sufficient to support a rate hike, and that data in the coming weeks would test that judgment. On October 30, markets priced about a two-thirds chance of a December hike; another 25 basis points would take the deposit rate to 2.75%, also the third hike of the year. Governing Council members already differ on the scale of further moves: Slovak central bank governor Kazimir warned on November 2 that markets may still be underestimating the tightening needed to curb inflation; Bank of Italy governor Panetta also advocated guarding against wage-price spirals, but stressed that rising bond yields are already pushing up financing costs and that this tightening effect should be factored into policymaking. For euro rates markets, what is more worth pricing is the path after December. The ECB's wage tracker shows that negotiated wage growth is expected to average 2.6% in the first three quarters of 2027. If wage growth remains moderate and tighter financing weakens companies' ability to raise prices, investors would have reason to lower expectations for the number of subsequent hikes even if the ECB raises rates in December; if services prices and wages continue to accelerate, Kazimir's warning will carry more weight.