ECB Survey Reveals Rising Inflation Expectations

Euro Zone Inflation Expectations Tick Up in ECB Consumer Survey

In a recent survey conducted by the European Central Bank (ECB), consumer expectations for inflation in the eurozone over the coming years have shown a slight increase. This development is likely to fuel concerns that the decline in price growth may not stabilize within the ECB’s target range.

ECB’s Ongoing Rate Hikes Amid Economic Uncertainty

The ECB has been consistently raising interest rates at its past nine meetings, bringing them to a more than two-decade high. However, the current economic landscape has prompted policymakers to reconsider their approach, given the rapid deterioration in the growth outlook and the increasing fear of a recession.

Inflation Expectations on the Rise

The ECB’s Consumer Expectations Survey revealed that inflation expectations for three years ahead rose from 2.3% in June to 2.4% in July, surpassing the ECB’s 2% target. This uptick is noteworthy as it contrasts with the trend of declining inflation expectations seen since spring.

ECB’s Outlook and Market Sentiment

The ECB’s own projections foresee a sharp drop in price growth for the current year, followed by a slower disinflation process in 2024. Some policymakers even caution that the “last mile” of disinflation may be protracted, potentially leading to a resurgence in price growth that exceeds the target.

However, market-based expectations suggest longer-term inflation rates of around 2.6%. This divergence underscores investors’ skepticism about the ECB’s willingness to take sufficient measures to mitigate inflationary pressures.

Economic Sentiment and Projections

Despite the uptick in inflation expectations, consumers continue to anticipate economic contraction. Growth expectations for the next 12 months were revised downward from -0.6% to -0.7%, as reported by the ECB.

Unemployment expectations remained unchanged, though respondents anticipated slightly slower nominal income growth. The ECB noted that the decline in expected nominal income growth was primarily driven by respondents in the lowest income quintile.

Market Outlook

As of now, financial markets perceive only a 25% chance of a rate hike on September 14th. Nonetheless, they anticipate a 25 basis point increase to 4% by year-end, preceding potential rate cuts expected to commence in mid-2024.

Stay informed as the ECB navigates a complex economic landscape, with inflation expectations and growth projections shaping their monetary policy decisions.

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