European households are now facing a new energy shock, following that of 2022. Since the start of the year, Eurozone inflation has climbed from 1.9% y/y in February to 3.8% in September. Energy is the main driver, in the wake of the conflict in the Middle East. The shock is feeding straight through to consumer prices, mainly via fuel and gas prices.
This resurgence in inflation comes while the effects of the previous inflationary shock have not yet fully worn off.
After Covid, that shock hit purchasing power hard. Since 2023, the situation had improved somewhat, with inflation slowing through to 2025.
There are two ways of looking at household purchasing power.
The first, and most comprehensive, is to look at their gross disposable income and adjust it for inflation to obtain real gross disposable income. This exceeds its pre-pandemic level in all the countries we look at, partly thanks to fiscal policy. This support has helped to offset the inflationary shock everywhere, whether through redistribution via social benefits, or through energy subsidies for households. Favourable employment trends have also supported disposable income, as has solid financial income.
The second approach involves subtracting inflation from wage growth. From this perspective, the picture is less positive. Real wages fell in 2022 and remain well below their level from the end of 2020 in most Eurozone countries, particularly in Germany. Spain is a notable exception, with strong economic growth that has boosted wages. Beyond this Iberian exception, however, the situation remains weak, and that continues to weigh heavily on household confidence and consumption.
What can we expect over the coming quarters?
We forecast that inflation will continue to rise, to just above 4% between December and February. It is then expected to ease, as energy prices stabilise. This easing, however, will be gradual, and inflation will not get close to 2% until the end of 2027. At the same time, nominal wage growth is expected to slow gradually, from 4.1% y/y in Q3 2026 to 3.1% by the end of 2027, according to our forecasts. Consequently, real wage growth is expected to slow until early 2027, before picking up as inflation eases.
Purchasing power, as measured by households’ real gross disposable income, is expected to benefit significantly less from fiscal support than in 2022. While social benefits should remain indexed to inflation, fuel subsidies are, and will remain, much more limited, with far less room for manoeuvre in public finances. In this context, after a slight gain on average in 2026, the purchasing power of Eurozone households is expected to stagnate in 2027.
What will this mean for household consumption?
We expect households to continue to stay cautious, given the risk that this inflationary environment could spill over into growth and employment.
