ECB economic bulletin: Inflation is expected to rise in the coming months, before declining to target in the course of next year

Domestic inflation remains high, as wages are still rising at an elevated pace. 

Labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. 

The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. 

The Governing Council is not pre-committing to a particular rate path.

The incoming information suggests that economic activity has been somewhat weaker than expected.

While industrial production has been particularly volatile over the summer months, surveys indicate that manufacturing has continued to contract. 

For services, surveys show an uptick in August, likely supported by a strong summer tourism season, but the latest data point to more sluggish growth. 

Businesses are expanding their investment only slowly, while housing investment is continuing to fall.

Exports have weakened, especially for goods.

Although incomes rose in the second quarter, households consumed less, contrary to expectations. The saving rate stood at 15.7% in the second quarter, well above the pre-pandemic average of 12.9%. 

Recent survey evidence points to a gradual recovery in household spending.

The labor market remains resilient, the unemployment rate stayed at its historical low of 6.4% in August.

Surveys point to slowing employment growth and a further moderation in the demand for labor.

The Governing Council expects the economy to strengthen over time, as rising real incomes allow households to consume more. 

The gradually fading effects of restrictive monetary policy should support consumption and investment.

Exports should contribute to the recovery as global demand rises.

Fiscal and structural policies should be aimed at making the economy more productive, competitive and resilient. That would help to raise potential growth and reduce price pressures in the medium term.