Past the headline: the ECB watches underlying inflation, the BoJ watches slack

Victoria Shinder06 October 2026, 09:222 min read

Two central-bank publications from 5 October deal with the same problem from opposite ends: how to tell whether inflation pressure is lasting when the obvious number can mislead.

Europe: an energy shock that has not yet spread. In his speech at the ECB monetary policy conference, Philip Lane pointed to September's 3.8% headline inflation, almost all of it energy (18.8%), with non-energy inflation at 2.3%, slightly lower than before the shock. His key test is the battery of underlying-inflation indicators, which so far show no upward shift in medium-term inflation, and no return of the rapid price-setting of 2022. He was explicit that no single indicator is enough, and that the read must also take in fiscal stimulus, AI investment and higher long-term yields.

Japan: demand above capacity. The Bank of Japan's quarterly estimates put the output gap at +0.55% in the second quarter, up from +0.36%, with potential growth at 0.81%. Its labour indicators point the same way: unemployment of 2.39% in July and a Tankan employment index of -38, meaning shortages far outnumber surpluses. Here the concern is the reverse of Europe's: not a cost shock that might fade, but domestic demand pressing against limited supply.

The shared caution. Both institutions put a warning on their own gauges. Lane said medium-term forecasts carry wide error bands at times of high uncertainty, which is why realised underlying inflation matters more as time passes. The BoJ said its output gap and potential growth estimates "need to be viewed with some latitude" because they depend on method and carry estimation error, and it now publishes labour-market indicators alongside them as a cross-check.

What it means for readers of policy. Neither bank is relying on one figure. In the euro area the next data that matter are the underlying measures, which will show whether the second wave of energy prices reaches services and goods. In Japan the next test is whether the gap and labour indicators keep tightening. In both cases, a single month's headline is the least informative number on the table.