Key Points:
- Inflation nears ECB’s 2% target, but essentials stay costly.
- Perceived inflation remains higher due to lasting price memories.
- Wages are rising, yet trust in policy lags.
Inflation across the eurozone has eased significantly from the record highs seen in 2022, but for many households, the relief remains largely invisible. Speaking before the European Parliament, Christine Lagarde acknowledged a growing disconnect between official data and everyday experience.
Annual inflation in the euro area has slowed to around 1.7% in early 2026, bringing it closer to the 2% target set by the European Central Bank. This marks a sharp decline from the double-digit inflation levels that strained households during the energy crisis and post-pandemic supply shocks.
Yet many families report that prices still feel high, particularly for essentials such as groceries, rent, and energy. While aggregate inflation has moderated, consumers tend to measure price pressures through frequent purchases of items that often remain elevated despite broader statistical improvements. As a result, the sense of financial strain continues even as macroeconomic indicators show stabilization.
Christine Lagarde emphasized that this divergence is not unusual. However, she described it as a serious communication challenge for policymakers, noting that public trust depends not only on achieving price stability but also on ensuring people feel the improvement in their daily lives.
Why Perceived Inflation Remains Elevated?
Economists have long observed that perceived inflation often exceeds actual inflation. Christine Lagarde referred to this as a global and historical pattern. When prices rise rapidly, the memory of those increases lingers. Consumers tend to notice price hikes more sharply than gradual declines, reinforcing the belief that inflation remains stubbornly high.
During the peak inflation years of 2021 and 2022, euro area households experienced rapid increases in energy and food costs. Even though those pressures have since eased, price levels themselves have not returned to pre-crisis levels; they have simply stopped rising as quickly. For many consumers, stabilization does not feel the same as relief.
Survey data collected by the ECB indicate that perceived inflation has consistently tracked above official figures by more than one percentage point on average. The gap widened considerably during the inflation surge and has narrowed only slowly. Lower-income households appear particularly affected, as a greater share of their spending goes toward necessities where price volatility has been most visible.
Christine Lagarde stressed that closing this perception gap is critical. If citizens believe inflation remains uncontrolled, it could undermine confidence in monetary policy even when policy measures are proving effective.
Wages Recover as Growth Remains Modest
Despite lingering sentiment concerns, underlying economic indicators show signs of stabilization. Core inflation, which excludes volatile items such as food and energy, has moderated, suggesting that structural price pressures are easing.
Real wages across much of the eurozone have begun to recover, in several cases surpassing pre-pandemic levels. As nominal wage growth has outpaced slowing inflation, purchasing power has gradually improved. This recovery has helped support consumer spending and has contributed to modest economic expansion entering 2026.
However, growth remains measured rather than robust. Policymakers remain cautious, balancing the need to sustain economic momentum while ensuring inflation expectations remain anchored. Lagarde reiterated that maintaining credibility is central to the ECB’s strategy.
The challenge now is not merely technical but psychological: demonstrating to households that inflation is genuinely under control. While data points to progress, restoring public confidence may take longer than stabilizing the numbers themselves.
In the months ahead, attention will likely focus not only on inflation metrics but also on how effectively policymakers communicate economic improvements to citizens still adjusting to a higher-cost reality.
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