Eurozone consumers more pessimistic about inflation, ECB survey shows

People have become more pessimistic about inflation in the euro area, betting that price pressures will remain strong in the coming years, even though they have been easing for most of the past six months.

European Central Bank said on Thursday that its latest monthly consumer survey showed their expectations for inflation next year, and in three years both rose above the central bank’s 2 percent target in March after four months of mostly falling readings.

The respondents are now waiting eurozone inflation up 5 percent a year from 4.6 percent in the same survey a month ago. In three years, they expect inflation to be 2.9 percent, up from 2.4 percent in the previous poll.

If people expect price pressures to remain high for a long time, it makes them more likely to push for higher wages and accept higher prices, which fuels inflation.

Rising inflation expectations are likely to spook policy makers, making further interest rate hikes more likely.

The ECB has already raised rates seven times since the summer to fight the biggest surge in inflation in a generation, leaving the base deposit rate at 3.25 percent.

Bye ECB Officials believe consumer inflation expectations tend to be heavily influenced by historical price increases and may be more volatile than investor or analyst expectations. Economists believe that the March survey will increase the chances of a further increase in the cost of borrowing.

“As long as inflation, wage growth and inflation expectations remain high and sticky, the ECB will err on the hawkish side,” said Frédéric Ducrozet, head of macroeconomic research at Pictet Wealth Management. “The main justification would be that the risk of overdoing is lower than the risk of doing too little.”

Eurozone wage growth has accelerated in recent months, with eurozone hourly wages Rose up a record 5.7 percent in the last quarter of 2022 from a year earlier.

Eurozone inflation fell from a record high of 10.6% in October to 7 percent in April, but much of that reflects the sharp drop in energy prices.

Line chart showing eurozone inflation rose for the first time in six months

Food, alcohol and tobacco prices have risen at double-digit rates since August and slowed only slightly to 14.9% in the year to April. Prices for services such as restaurants, travel and leisure have yet to come down after rising 5.2% in April.

ECB President Christine Lagarde said The Japanese newspaper Nikkei this week reported “significant risks of higher inflation”, which meant it still had “more grounds to cover” the rate hike, especially after “various European wage increases”.

For the first time in years, investors have recently begun betting that eurozone inflation will remain higher than the US, based on a closely monitored 5-year swap rate pegged to a 5-year inflation rate.

The ECB said last week that survey of professional forecasters showed that their expectations for inflation eased slightly this year and next, but rose to 2.2 percent by 2025.