Inflation forecast: 1.9% for 2025 and 2026

Inflation was relatively low in the first quarter of 2025, standing at 1.7% in April. Automatic wage indexation was triggered in April 2025, leading to the payment of an index-linked tranche on 1 May 2025. Despite the international context of heightened trade tensions, STATEC forecasts inflation to be limited to 1.9% in both 2025 and 2026. The next wage indexation would therefore take place in the third quarter of 2026.

STATEC's inflation forecasts now include a more detailed view of the various inflation aggregates for Luxembourg, with specific forecasts for inflation in services, energy, food (including alcohol and tobacco) and non-energy industrial goods[1].

Annual inflation rate and contributions

_{Source : STATEC (forecasts as of 07/05/2025)}

In the first quarter of 2025, the downward trend in services inflation continued, offset however by the positive contribution of energy due to the easing of support measures on energy prices. Inflation in Luxembourg rose to 1.7% in April, driven in particular by services and food, while pressure on energy prices eased significantly. Underlying inflation[2] stood at +2.0% in April (compared with +1.5% a month earlier).

The price increases observed in April for services (+2.2% year-on-year, +0.9% month-on-month) and food (+1.7% year-on-year, +0.6% month-on-month) can largely be explained by unfavourable base effects[3] linked to the slowdowns recorded a year earlier. By contrast, oil prices continued to fall in April, following the collapse in oil prices, posting annual inflation of -6.1%. This has significantly reduced energy inflation to 1.1% (compared with +6% on average in the first quarter of 2025). With the intensification of trade tensions linked to the Trump administration's policies weighing heavily on oil markets in April 2025, the recent announcement by OPEC+ of an increase in its production, combined with the depreciation of the dollar against the euro, should continue to limit inflationary pressures on energy in Luxembourg and in the euro area in the coming months.

Similar trends can be observed across the euro area, where inflation remained stable at 2.2% according to preliminary estimates for April (compared with 2.4% a year earlier). As in Luxembourg, inflation in services and food products is rising (from +3.5% and +2.9% in March 2025 to +3.9% and +3% in April), while energy prices slowed significantly in April (-3.5% year-on-year, after -1% in March).

Despite trade tensions, inflation is expected to remain close to 2% in the eurozone...

The main international institutions anticipate average inflation in the eurozone of close to 2% in 2025 and 2026. For 2025, forecasts range from 1.9% (Oxford Economics) to 2.3% (European Commission), slightly higher than those anticipated in the first quarter of 2025, largely due to growing economic tensions worldwide. For 2026, inflation is forecast to range from 1.8% (Oxford Economics) to 2% (OECD).

The new projections from Oxford Economics (OE), used in STATEC's inflation forecast model, highlight the uncertainties surrounding the Trump administration's policies and predict a significant depreciation of the USD exchange rate against the EUR to 1. 09 USD/EUR in 2025 and 1.10 USD/EUR in 2026 (compared with 1.04 USD/EUR and 1.06 USD/EUR previously). The assumption for the price of Brent crude has been revised downwards to USD 68 per barrel for 2025 and USD 67 per barrel in 2026 (compared with USD 73 per barrel previously). The depreciation of the dollar against the euro would further ease Europe's oil bill. The contrast between upward inflationary pressures linked to a trade war and downward pressures corresponding to the risks of a global slowdown (weighing on consumption and investment) make the economic environment exceptionally uncertain. However, price pressures in the eurozone are likely to ease as energy costs fall in line with the global economic downturn.

…as well as in Luxembourg

In Luxembourg, the recent rise in inflation has led to automatic wage indexation on 1 May 2025. Inflation is expected to rise further in the coming months, reflecting both the impact of wage indexation and the strengthening of positive base effects on energy, particularly at the end of the year. Lower-than-expected inflation in the first quarter of 2025 and the sharp fall in oil prices in euros have prompted STATEC to revise its inflation forecast for this year down to 1.9% (from 2.2% in February). For next year, inflation forecasts have been revised slightly upwards to 1.9% (compared with 1.8% previously). Inflation in services is expected to be 1.9% in 2025 and 2.1% in 2026, while food inflation is expected to be 1.6% in 2025 before rising to 1.9% in 2026. However, energy inflation is expected to fall from 7.2% in 2025 to 4.2% in 2026, reflecting negative base effects. According to these forecasts (which constitute STATEC's central scenario), the next wage indexation would take place in the third quarter of 2026.

Forecasts based on alternative assumptions about energy prices

<sup>Source: STATEC (forecasts as of 07/05/2025)
* In Luxembourg, core inflation includes electricity prices. 
** These forecasts include a €5/tCO2e increase in CO2 tax in 2026.
*** Average prices including VAT for a residential customer in Luxembourg with annual consumption of 2,426 m3 of gas and 3,901 kWh of electricity. These prices are calculated assuming (i) for gas: network usage tariffs remaining constant at their 2025 levels, (ii) for electricity: from 2026, a return of the contribution to the compensation mechanism to its 2021 value (before the energy crisis), i.e. 0.0363 EUR/kWh.</sup>

Two alternative energy price scenarios

Two alternative scenarios have been developed based on historical deviations in the electricity, gas and Brent oil markets (the latter affecting diesel, petrol and heating oil prices). Taking into account the measures in place (and in particular the same price for electricity in 2025 in both scenarios), the high and low scenarios for electricity only diverge for the year 2026. The high scenario assumes that in 2026, electricity, gas and Brent will increase by 30%, 7% and 17% respectively. The low scenario anticipates a smaller increase in the price of electricity (+13%) and a decrease in the price of gas (-9%) and Brent (-23%) in 2026.

In the high scenario, the next indexation would take place in the fourth quarter of 2025, followed by another in the fourth quarter of 2026. Similar to the central scenario, the low scenario anticipates indexation in the third quarter of 2026.

[1] Further details on the new inflation forecast model used will be provided in the next STATEC Economic Report, which will be published on 25 June 2025.

[2] Core inflation is a sub-series of the general index (IPCN) which excludes, in particular, oil prices and other prices formed on international markets. In Luxembourg, core inflation includes the price of electricity.

[3] Prices for these two aggregates had slowed significantly in the second quarter of 2024.