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Eurozone consumers do not believe the European Central Bank will be able to fully tame inflation over the next 12 months, potentially complicating policymakers’ plans to continue lowering borrowing costs.
The rise in household inflation expectations for the third consecutive month, according to ECB data published on Friday, comes a day after the ECB cut rates to 2.75 per cent and warned that low consumer confidence was likely to drag on the bloc’s weak economy.
Consumers polled last month expected an annual inflation rate of 2.8 per cent over the next 12 months, up from 2.6 per cent in November and the highest level since July, the latest ECB data showed. That rate would be significantly above the ECB’s target of keeping price increases at 2 per cent over the medium term.
Households also fear the central bank will continue to miss that goal and are bracing for an average of 2.4 per cent of inflation over the next three years — the same rate as the bloc’s last inflation reading in December.
Inflation expectations are important medium-term drivers of actual inflation as they influence wage demands and spending behaviour, which in recent years has been hit by the strongest inflationary surge in a generation in the wake of the pandemic and Russia’s full-scale invasion of Ukraine.
The latest expectations represent a growing divergence from official forecasts. The ECB last month predicted annual inflation at 2.1 per cent this year and 1.9 per cent in 2026. Economists share those forecasts, the ECB’s Survey of Professional Forecasters showed on Friday.
When the ECB on Thursday cut interest rates by a quarter point for the fifth time since last summer, the bank’s president Christine Lagarde warned that consumer spending was still weak and flagged that price rises in the next few months could fluctuate around December’s 2.4 per cent figure before coming down.
Perceived inflation by consumers last month was still much higher at 3.5 per cent, up from 3.4 per cent in November, the survey showed.
Lagarde indicated on Thursday that further rate cuts were likely, without committing to the pace, size and timing of such moves.
In Germany, annual inflation in January was unchanged from a month earlier at 2.8 per cent, a full percentage point higher than in France, where consumer prices rose 1.8 per cent, the countries’ statistical agencies reported.
Tomasz Wieladek, an economist at T Rowe Price, said the ECB was still likely to “look through” the increase in household inflation expectations, arguing it was “a blip” that was driven by increases in food and energy prices.
“Bank of England research shows that 60 per cent of household expectations is due to food price inflation,” said Wieladek, adding that this was likely to be the case in the Eurozone too.
Global food prices have started to fall recently, he said, adding: “This will translate into lower retail food prices in three to six months’ time.”
Christian Schulz, an economist with Citigroup, said “longer-term expectations are well lower than the 3 per cent reached in 2022”, suggesting that the consumer data would not alarm the ECB.
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