Inflation in the euro area rose to 3.2% in August, up from 2.9% in July, and the central bank had already raised rates in response. ECB President Christine Lagarde laid out the reasoning to the European Parliament’s Committee on Economic and Monetary Affairs in Brussels on 28 September 2026, in a regular hearing that also gave a long section to artificial intelligence.
A resilient economy, an energy problem
Lagarde told lawmakers the euro area economy held up despite the energy shock. Real GDP growth was solid in the second quarter of 2026, she said, spread across most countries and sectors, and she expected the same pattern in the third. Factories were helped by higher government spending on defence and infrastructure. Consumer confidence had recovered from its spring lows, which lifted services, and AI-related activity showed up in digital services, business investment and exports.
Unemployment stood at 6.4% in July, though employment and labour force growth kept slowing. ECB staff projections put growth at 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028.
The price picture was less comfortable. Energy inflation climbed to 14.3% in August from 10.3% a month earlier, Lagarde said, with refining margins on liquid fuels and higher energy commodity prices doing much of the work. Food inflation eased to 1.1% from 1.2%. Excluding energy and food, inflation slipped to 2.4% as services prices cooled and goods prices partly offset that. Pay growth, measured as compensation per employee, was 3.3% in the second quarter after 3.6% in the first, so wages had not yet reacted to the shock.
Staff projections see headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. For inflation excluding energy and food the figures are 2.5%, 2.6% and 2.3%. Shorter-term expectations remain elevated, but most longer-term measures sit around 2 per cent. The outlook, she said, carries high uncertainty, with inflation risks tilted up and growth risks tilted down.
Why the rates went up
At its meeting earlier in September the ECB raised its three key interest rates by 25 basis points. Lagarde described the bank’s approach to energy shocks plainly: it does not react to energy prices as such, only to the risk that they become embedded in inflation. That is judged on three criteria, which are the inflation outlook, how energy costs spread to other prices and wages, and how policy reaches borrowing costs and growth.
On the first, she saw higher inflation ahead in 2027 and 2028 than a few months earlier, mostly because of energy. On the second, she saw no evidence yet of energy prices feeding into wages. On the third, long-term interest rates had risen notably since the previous meeting, which she said would slow growth and cut pass-through by more than the September projections assumed. The conclusion was a “middle path”: the shock was too large to look through, so a measured response made sense.
The AI question
The hearing’s stated topic was AI. Lagarde said firms were set to devote around 10% of total investment to it in 2026, and that AI-related borrowing already made up roughly a quarter of credit growth to firms. An ECB survey found 38% of euro area firms reporting at least moderate AI use by late 2025, but only 7% reporting significant use.
She also pointed to a risk in markets. Equity valuations are concentrated in a small number of AI firms that are borrowing more, and a sharp reassessment could spill over to euro area investors. On jobs, she said over 50% of workers already use AI and firms are still hiring, though those using it mainly to cut labour costs are reducing staff. The ECB’s own words on the subject, in her closing: uncertainty is not a reason for inaction.
