The European Commission significantly raised its euro-zone inflation outlook and warned of “persistent challenges” even as it acknowledged the resilience of the region’s economy.

Citing the strength of underlying pressures, European Union officials lifted their projections for consumer-price growth to 5.8% this year and 2.8% in 2024. Forecasts for economic expansion were also increased throughout the horizon.

Key to the higher inflation outlook was a three quarters of a percentage point gain in the Commission’s assessment for so-called core inflation, which strips out volatile elements such as food. That measure will exceed the headline gauge for price growth both this year and next, according to Brussels officials.

The projections underscore the challenge faced by European Central Bank policymakers. They have raised benchmark borrowing costs by 375 basis points in a bid to tame inflation, and may now diverge from the US Federal Reserve as they factor in more hikes amid the fear that underlying price growth is lingering.

“Core inflation is set to decline gradually as profit margins absorb higher wages and tighter financing conditions prove effective in cooling demand,” the Commission said. “Persistently high price pressures in services coupled with only slowly fading pressures in (processed) food and goods are expected to keep core inflation elevated.”

The EU’s forecast for headline price growth this year is now half a percentage point higher than the ECB outlook released in March. For next year, it’s just 0.1 percentage point lower.

The forecasts are more upbeat on growth than prior comparatively dire outlooks from the Commission.

“Thanks to determined efforts to strengthen our energy security, a remarkably resilient labour market and easing supply constraints, we avoided a winter recession and are set for moderate growth,” Paolo Gentiloni, the EU Commissioner for Economy, said in a statement.

The region’s gross domestic product will now rise 1.1% this year and 1.6% in 2024, both outcomes marginally higher than before. No recession is envisaged for any euro-area country throughout the horizon.

Estonia will suffer the only annual contraction in the euro region in 2023 with a drop of 0.4%, according to the outlook. The sole other one envisaged in the EU as a whole will be Sweden’s 0.5% decline. That outcome is better than previously forecast, though it incorporates a 1.1% slump during the current quarter.

Gentiloni warned that the improved growth outlook shouldn’t be a cause for complacency.

“Risks remain too plentiful for comfort and Russia’s brutal invasion of Ukraine continues to cast a shadow of uncertainty over the outlook,” he said.

--With assistance from Jorge Valero.