The risk of rising inflation in the Euro zone may be more pronounced than previously expected, according to Isabel Schnabel, a member of the European Central Bank (ECB) board. Speaking on Wednesday, Schnabel emphasized that while Euro zone inflation is unlikely to fall significantly below target, there are several upside risks that could push prices higher.

Euro Zone Inflation Trends and ECB Target

Throughout 2025, Euro zone inflation has hovered near the ECB’s 2% target. Analysts have raised concerns that inflation could dip below this threshold in the coming year, reminiscent of the prolonged periods of low inflation seen in the pre-pandemic decade. However, Schnabel dismissed these concerns, arguing that economic indicators suggest the Eurozone is on a path of recovery rather than disinflation.

“My narrative is one of an economy that is recovering, with a closing output gap, expecting a significant fiscal impulse, which stimulates the economy,” Schnabel said during a BNP Paribas conference.

According to Schnabel, these factors indicate that the Euro zone is not experiencing disinflationary pressures. In fact, current trends could push inflation slightly above expectations.

Stabilizing Exchange Rates and Trade Dynamics

One of the key drivers of inflation is the Euro’s exchange rate, which has recently stabilized. This stabilization reduces imported disinflationary pressures that could otherwise weigh on prices. Schnabel also noted that fears of China offloading surplus exports into the European market have not materialized, with Chinese exports to the EU actually declining.

“Actually, exports from China to the EU are now going down. So far, this risk hasn’t materialized,” Schnabel said.

This development diminishes the threat of external factors keeping inflation low, further supporting the ECB’s view that upside risks may dominate.

Geopolitical and Supply Chain Factors

Schnabel highlighted that geopolitical fragmentation could contribute to higher costs for businesses, which could, in turn, push inflation upward. Supply chain disruptions, including limited access to critical raw materials such as rare earth elements, remain another source of potential price pressures.

Additionally, food price inflation remains elevated, while wage growth has not slowed as much as initially anticipated. Together, these dynamics suggest that inflationary pressures in the Euro zone may remain robust.

“Overall, this leads me to the conclusion that, if anything, risks are rather tilted a little bit to the upside,” Schnabel concluded.

ECB’s Stance on Inflation Deviations

While acknowledging these upside risks, Schnabel reaffirmed the ECB’s capacity to tolerate minor deviations from its inflation target. This flexible approach allows the central bank to maintain economic stability without overreacting to short-term price fluctuations.

As the Euro zone navigates a recovering economy, fiscal stimulus measures, stabilized exchange rates, and ongoing global trade dynamics will continue to influence inflation trends. Schnabel’s outlook underscores a cautious optimism, signaling that the ECB is prepared for both modest overshoots and undershoots of its inflation target.