Economics Update July 2026 - Inflation: Things Are Calming Down, but It’s Not Time to Let Our Guard Down—Especially Not for the U.S.

In the eurozone, the inflation rate fell to 2.8 percent in June, down from 3.2 percent in May. This is, of course, encouraging. Inflation is also expected to have declined in the U.S.: We anticipate a rate of 3.7 percent in June, down from 4.2 percent the previous month. Market participants reacted with relief and have rightly scaled back their expectations regarding potential interest rate hikes by central banks.

The bad news, however, is that inflation will remain at a level well above the central banks’ 2 percent target at least until the end of the year. In the eurozone, the outlook is good that inflation could return to near the 2 percent mark in the first half of 2027—once the energy price shock has fallen out of the statistics. The outlook for the U.S. economy, on the other hand, is more critical. There are two reasons for this. The first is the difference in economic momentum. The U.S. economy remains robust; this year, real gross domestic product (GDP) is expected to grow by about 2 percent. In the eurozone, however, a strong and self-sustaining recovery is still not in sight. Economic output here will rise by only about 0.3 percent this year and is expected to grow by less than 1 percent next year as well. In such an environment, companies find it difficult to pass on higher energy prices or input costs to their customers. The scope for workers to secure higher wages is also limited. The risk of second-round effects that would keep inflation at a high level is therefore low.

The second reason for the persistent inflation problem in the U.S. lies in the main driver of strong growth: the AI boom itself is contributing to price increases. In particular, high-end AI memory chips—which have become drastically more expensive—are a significant factor driving inflation. This was recently demonstrated by Apple’s announcement of price increases.

Risks to the U.S. Economy

In the medium term, this poses risks for the U.S. economy. Either the current trend continues—with the result that inflation does not readily fall toward the target of 2 percent. The Federal Reserve would then have to seriously consider raising interest rates, despite the resulting negative effects on financing conditions and, consequently, on the overall economy. Or the AI boom could come to an end or give way to a temporary period of disillusionment, during which the very high expectations are revised downward somewhat. The resulting price corrections for technology stocks would have a significantly dampening effect on private consumption—and thus on the economy as a whole—due to the negative impact on asset prices.

In the short term, relief over lower energy prices and the resulting dampening effect on inflation is likely to prevail in the markets. However, it is too early to sound a general all-clear: the issue of inflation rates exceeding the target is likely to remain relevant. In this context, our primary focus is clearly on developments in the U.S.