These new figures represent a substantial upward revision compared with the June projection exercise – of 1.3 percentage points (pp), 2 pp and 0.2 pp, respectively-. Furthermore, economic activity in the euro area is expected to slow down notably in the coming quarters. This moderation will reflect the loss of purchasing power resulting from higher-than-expected inflation, the deterioration of consumer and business confidence and high uncertainty, the energy crisis and geopolitical risks, weakening global demand, and tighter financial conditions as a result of monetary policy normalisation, as well as the dissipation of the impact of the reopening following the lifting of Covid restrictions. Indeed, qualitative indicators -such as the Purchasing Managers’ Index (PMI) or the business and consumer surveys conducted by the European Commission- show a marked moderation of activity across the main economies in both manufacturing and services in the third quarter. Meanwhile, although supply bottlenecks are easing, activity in some manufacturing sectors is still limited. These various factors behind the increase in inflation have affected European citizens in different ways. First, the rising price of energy commodities has had a direct impact on the more vulnerable households through the increase in energy bills (electricity, gas and petrol). Second, this has had an indirect effect through the rise in prices of the products whose production costs are most affected by the price of energy, such as food. In this context, European governments have adopted fiscal and other types of measures to offset the impact of inflation.

Nevertheless, whether or not these reserves prove sufficient will depend on the weather conditions this coming winter, and on Europe’s ability to replace them as and when they are consumed. In short, the inflation pressures we had been experiencing due to the reopening of economies after the pandemic, the supply-side bottlenecks and the higher commodity prices have been exacerbated by the conflict with Russia, leading to extraordinary and persistently high rates. According to Eurostat,2 euro area annual inflation is expected to rise to 10% in September. This means that average inflation during the third quarter stood at 9.3%, a figure somewhat higher than anticipated in the ECB's last forecast exercise (9.1%).3 More importantly, euro area inflation is expected to remain above 9% during the fourth quarter. The rise in energy and food prices is the main factor behind the high levels of inflation in the region. The depreciation of the euro has also contributed to upward price pressures, particularly by increasing the price of commodity imports. Specifically, according to the flash estimate, the price increases over the past year in the energy and food components of the consumer price index stood at 37% and 11%, respectively, in September. These two components account for almost 70% of the increase in consumer prices in the euro area over the past year. Nonetheless, inflationary pressures are also spreading to the less volatile components of the consumer basket. Underlying inflation, which excludes food and energy consumer prices, is expected to hit 4.8% in September.