Consumer inflation expectations in the Eurozone for the next 12 months fell significantly in May, according to the latest monthly survey released by the European Central Bank (ECB) on Friday. The survey data shows consumers expect prices to rise by 3.5% over the coming year, a notable decrease from the 4% forecast in April. However, the three-year and five-year inflation expectations, which hold more weight for monetary policymakers, remained elevated at 2.9% and 2.4%, respectively.
This survey was conducted between May 7 and June 1, prior to any substantive progress on a lasting peace agreement between the US and Iran. Subsequently, rising ceasefire expectations have pushed oil prices back to pre-conflict levels and led economists and investors to scale back their bets on further ECB interest rate hikes.
The ECB raised borrowing costs earlier this month for the first time in 2023 and has not ruled out further increases. Policymakers have warned that inflationary pressures are spreading beyond the initial surge in energy prices, showing a broader upward trend. The intensification of core inflation pressure in May supports this assessment.
ECB Executive Board member Isabel Schnabel stated this week that, under current circumstances, more action is needed to bring inflation back to the 2% target. In contrast, President Christine Lagarde and Chief Economist Philip Lane have expressed a more cautious stance, citing concerns about the Eurozone's economic outlook.
Lagarde previously warned that high energy prices are beginning to transmit to other parts of the economy, with the risk of "second-round effects" emerging. However, she said last week that, given inflation expectations remain anchored and are projected to return to target in the medium term, there is no need for more aggressive measures due to the Middle East conflict. Lane also believes that even with sustained peace in the Middle East, Eurozone inflation will remain above the 2% target for some time, but this shock only requires a "prudent policy response."
The hawkish stance is supported by recent inflation data. Eurostat figures show the final CPI for the Eurozone in May was 3.2%. More concerning for the market is the core inflation indicator—the core CPI excluding energy, food, alcohol, and tobacco rose to 2.6% in May, up from 2.2% in April. Energy prices surged 10.8% year-on-year, contributing 0.98 percentage points to inflation, while services rose 3.5% year-on-year, contributing 1.61 percentage points, making it the primary driver. The acceleration in core inflation indicates price pressures are gradually spreading across a wider range of economic sectors.
The survey also revealed that respondents expect the Eurozone's GDP to contract by 1.7% over the next 12 months, a less severe decline than the 2.2% forecast in April. Expectations for the unemployment rate one year from now edged up slightly to 11.3%. Consumer expectations for house price growth dipped to 3.6% from 3.7% in April. Among these, the lowest-income group's average house price growth expectation was significantly higher at 4.1%, compared to 3.4% for the highest-income group.
Comments