Barclays lifts euro area 2025 inflation forecast to 2.1% on food, energy costs

Barclays has raised its 2025 euro area headline inflation forecast to 2.1% from 2.0%, attributing the revision to firmer food and energy costs, while its core inflation estimate remains unchanged at 2.3%. This adjustment, driven by elevated food and tobacco prices alongside a slower decline in energy costs, sees the bank's 2025 projections generally below market pricing for most of the year but exceeding expectations by year-end, with food and tobacco inflation anticipated to persist above 3% for some time.

Analysis

Barclays has upwardly revised its 2025 headline inflation forecast for the euro area to 2.1% from its previous 2.0% estimate, citing firmer-than-expected food and energy costs in recent data. The bank's core inflation forecast for 2025 remains unchanged at 2.3%, suggesting the inflationary pressures are concentrated in volatile components rather than being broad-based. This view is supported by recent Eurostat figures showing a modest acceleration in headline HICP driven by food, alcohol, and tobacco, while core inflation held steady. Barclays projects that food and tobacco inflation will remain above 3% for some time, while energy prices are expected to return to deflationary territory for most of the forecast horizon. The bank’s projections for 2025 are below market pricing for most of the year but are expected to exceed market consensus by year-end. For 2026, the outlook remains stable with headline inflation forecast at 1.7% and core at 1.8%, indicating an eventual return to a disinflationary path.

Key Decisions for Investors

• The upward revision to headline inflation, driven by sticky food and energy prices, reinforces the potential for European Central Bank policy to remain restrictive, which could be a headwind for rate-sensitive assets in the near term.
• Investors should consider the divergence between headline and stable core inflation, as this may present sector-specific opportunities; companies with pricing power in the food and tobacco sectors may outperform, while energy-intensive industries could benefit from expected energy price deflation.
• Given Barclays' forecast is below market pricing for most of 2025 before crossing above it late in the year, investors could evaluate positions in euro area fixed income for potential mispricing in the forward rates curve for that period.