The domestic market’s failure to absorb international turmoil is dangerously widening the gap with its Eurozone partners. Harmonized inflation in Greece climbed to 4.9% in May, compared to the European average of 3.2%, violently reversing the deflationary trend.
The Bank of Greece makes it clear that the start of a substantial decline in prices is now being pushed back to 2027 (to 2.6%), while inflation will persist into 2028, despite the upward pressure that will be exerted by the introduction of the European Union Emissions Trading System (ETS2) in transportation and buildings.
| Index | NEW Forecast 2026 | Revision / Trend | Forecast 2027 |
|---|
| Inflation Greece (TTE) | 3.8% | Upward pressure due to faster pass-through of energy costs | 2.6 |
| Eurozone Inflation (HICP) | 3.0 | Stabilization near current levels | 2.3 |
| Consensus Forecasts (June) | 2.9 | Revision jump of +0.6% for Greece | +0.4% (Revision) |
| Business expectations | 3.3 | Increase from the previous quarter (2.9%) | 3.3% (Over a 3-year horizon) |
The energy paradox
Energy inflation over the past two months has risen at twice the rate of the Eurozone, reflecting a historically more intense and aggressive adjustment of domestic prices. The May figures are revealing, as reported by the Bank of Greece. Liquid fuels recorded an annual jump of 53.2%, transportation fuels rose by 22.1%, natural gas from the grid increased by 21%, while electricity rose by 5.9%, trapping businesses in a suffocating cost environment.
The response of businesses
According to the Bank of Greece’s newsletter, Greek industries are passing on energy costs directly to consumers to protect their profit margins. According to May data on the PMI index, input price inflation in manufacturing hit a high not seen since June 2022 due to shortages of raw materials. The response from factories was immediate, with output (selling) prices reaching a four-year high. At the same time, managers’ expectations for retail prices over the next three months strengthened significantly in the services, retail, and construction sectors.
Central banks
The prolonged inflationary surge is “locking in” higher interest rates for a longer period. The European Central Bank already raised rates by 25 basis points on June 11. Money markets now price in a new hike in September or October 2026 as highly likely, with expectations pointing to tightening continuing through the second quarter of 2027. On the other side of the Atlantic, the Federal Reserve is on a similar trajectory, with the market pricing in a first rate hike in late 2026 and a second in the first half of 2027.
Geopolitical risks
The central bank’s forecasts remain inextricably linked to the geopolitical front. The prolongation of conflicts in the Middle East is fueling inflationary pressures, primarily through the cost of maritime transport and attacks in the Red Sea that force container ships onto costly routes. However, the recent announcement of the Memorandum of Understanding (MoU) between the U.S. and Iran offered some initial relief. Brent and WTI oil prices fell slightly, dampening short-term inflation expectations in the markets, although medium-term projections in the U.S. remain firmly above 2%.