Recent economic research and forecasts paint an insightful and detailed picture of the Eurozone’s recovery, distinguishing between lasting and short-lived inflationary pressures while projecting modest expansion ahead. A new Bank of England staff working paper, released on 13 February 2026, offers fresh analysis of post-pandemic price surges, while KPMG‘s latest European Economic Outlook anticipates steady but subdued GDP gains through 2027.
The Bank of England paper, authored by Clemente Pinilla-Torremocha (Staff Working Paper No. 1,170), employs an advanced econometric framework to disentangle inflation drivers.
The model integrates trend-cycle decomposition, time-varying volatility, and fat-tailed distributions to handle extreme events like the COVID-19 shock, alongside structural identification of shocks by origin (global versus domestic) and type (demand, supply, or energy-specific), as well as persistence (permanent or transitory).
Key results challenge prior studies. Domestic supply shocks—such as those from supply-chain disruptions—primarily elevated the persistent component of inflation, pushing trend inflation up to around 3% by mid-2022.
In contrast, demand shocks, both from within the Eurozone and globally (linked to fiscal and monetary stimulus plus pent-up demand), dominated the transitory inflation gap, accounting for approximately 85% of the post-COVID price surge.
These demand factors explained roughly 70% of the variance in the short-term inflation component during the recent episode.
The analysis also revisits the pre-COVID “missing inflation” period from 2012 to 2017, attributing the drop in trend inflation to about 1% largely to sustained negative demand shocks.
Overall, the framework underscores a slowdown in potential GDP growth, falling from an average quarterly rate of 0.50% in the early 1990s through 2005–06 to just 0.24% thereafter, driven mainly by global influences.
By separating persistent and transitory elements, the paper provides clearer guidance for policymakers: supply-driven shifts in trend inflation may warrant more structural responses, while demand-led transitory spikes call for calibrated, temporary measures.
Complementing this inflation-focused research, KPMG‘s February 2026 outlook forecasts Eurozone GDP growth of 1.1% in 2026, rising to 1.5% in 2027.
The projections, derived from Oxford Economics’ Global Economic Model, emphasise domestic demand as the primary engine amid a volatile global trade landscape.
Resilient labour markets and robust nominal wage increases are expected to bolster real disposable incomes and support consumer spending, though households are likely to remain cautious with high savings rates persisting into late 2026.
Headline inflation is projected to ease to 1.7% in 2026, dipping below the European Central Bank’s 2% target and potentially allowing stable policy rates in the near term.
The end of quantitative tightening programs could further ease borrowing costs and aid investment.
KPMG also highlights the role of artificial intelligence, noting that 37% of EU firms have adopted some form of AI, with potential to automate around 2.5% of worker tasks and boost long-term productivity—though successful integration will require targeted retraining to minimise transition risks.
New trade agreements with India and Mercosur offer strategic benefits but are unlikely to provide immediate economic lifts due to modest trade volumes.
KPMG Chief Economist for EMEA Yael Selfin observed,
“Europe is entering a period where growth will rely less on external tailwinds and more on domestic fundamentals. While new trade deals enhance strategic resilience, they are unlikely to deliver a significant short-term boost. Instead, fiscal support, easing inflationary pressures and investment conditions will be key to sustaining momentum.”
Together, the Bank of England’s decomposition of inflation shocks and KPMG’s growth projections suggest a Eurozone poised for gradual normalisation.
With transitory inflationary pressures fading and domestic drivers taking centre stage, the region faces a path of modest expansion tempered by global uncertainties.
For the ECB and national authorities, these insights reinforce the value of distinguishing between enduring structural changes and temporary fluctuations when calibrating policy in 2026 and beyond.