ECB president Christine Lagarde says their 2% inflation target is ‘in sight’

Christine Lagarde says 2025 could finally be the year the European Central Bank (ECB) hits its long-elusive 2% inflation target. “We’ve made significant progress in 2024 in bringing inflation down,” she said, adding that the ECB is sticking to its strategy to stabilize inflation sustainably at that goal.

The road has been anything but smooth though. Inflation dipped below 2% last September, only to climb again in recent months. Lagarde has warned about these fluctuations but insists the ECB’s plan is working.

Interest rates have already been cut four times in quarter-point steps, and economists expect another four cuts by June. 2025 is actually gonna be a packed year for the ECB, with projects ranging from a digital euro to redesigned euro-area banknotes.

Inflation forecasts: Chaos to control

Inflation in the Eurozone has been like playing darts blindfolded. Lagarde laid it all out in her December 16 speech: predictions were wildly inaccurate from 2022 to 2023. ECB staff relied on machine learning models, which revealed that uncertainty around inflation forecasts was four to five times higher than usual. 

And it wasn’t just bad luck. Incoming data kept proving the projections wrong. So in September 2022, the ECB hit reset. The risk of inflation expectations spiraling out of control was too high, so they set a hard timeline for hitting 2%.

Public confidence was the goal—no more moving the finish line. It worked. By late 2023, six consecutive forecasts showed inflation returning to target in 2025. Even better, the projections are now far more reliable. Lagarde pointed out that uncertainty levels have dropped back to pre-pandemic norms.

Real data backs this up. Inflation forecasts for 2023 became more accurate, especially for headline inflation. Core inflation projections caught up in 2024, while household surveys and market indicators showed inflation expectations at around 2% for the next three years.

What’s behind the numbers?

From surging energy prices to supply chain chaos, each disruption has lingered, making inflation harder to control. These aren’t short-term hiccups—they’ve been structural challenges.

To tackle this, the ECB leaned on a framework with three focus points: the inflation outlook, the dynamics of underlying inflation, and how well monetary policies are working.

Here’s the result: measures of underlying inflation—what’s driving the long-term trend—have now narrowed to historical averages. Most indicators sit between 2% and 2.8%, a range Lagarde takes as a good sign.

The ECB’s Persistent and Common Component of Inflation (PCCI), a key metric, has stayed solidly at 2% since late 2023. Still though, some numbers are stubborn. Domestic inflation, largely driven by services, is higher—hovering around 4%.

Lagarde pointed to repricing earlier in the year as the culprit but noted a steep drop in inflation momentum for services. Wage growth is also cooling off. The ECB’s wage tracker shows wage growth sliding from 4.8% in 2024 to an expected 3% in 2025, a level that aligns with their 2% inflation target.

What’s keeping policymakers up?

Then there’s the economy. It’s keeping Lagarde and her crew up at night. Growth forecasts for the Eurozone keep shrinking. Back in June 2023, the ECB expected the region to grow by 1.5% in 2024. That’s now down to just 0.7%. A big part of the problem is weak domestic investment.

Households, despite rising real incomes and high employment, are saving more than they’re spending. Lagarde called this a hangover from high inflation in past years.

Geopolitical uncertainty is another wildcard. If the United States, the Eurozone’s largest export market, leans into protectionism under President Trump, growth would likely take a hit. On top of that, European exporters are vulnerable to changes in global trade confidence, making this a double-edged sword for the policymakers.

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