Consumer anticipations regarding eurozone inflation experienced a decrease, although they remained higher than the European Central Bank’s (ECB) established target of 2 percent in June based on the latest ECB survey data. As indicated by the ECB’s monthly survey today, projections for the upcoming 12 months fell to 3.4 percent from May’s 3.9 percent. Over three years, the inflation also declined from 2.5 percent to 2.3 percent.
These findings emerge ahead of a crucial September meeting where President Christine Lagarde has underscored the significance of the decision between either implementing the 10th consecutive increase in the deposit rate or opting for a pause.
ECB working to keeping inflation at the 2% target threshold
A recent report conducted by the ECB, published last week, revealed that the underlying inflation, a crucial parameter closely monitored during tightening monetary policy, has most likely reached its peak. In contrast, market indicators reflecting price growth are currently testing historical highs. A measure predicting future inflation concluded at its most elevated level since 2010, indicating an average trajectory of 2.67% spanning the period between 2028 and 2033.
This development coincides with a trend where yields on bonds with longer maturities are rising more rapidly than those on shorter-term notes. This shift is driven by investors seeking greater returns on assets that extend well into the future, reflecting concerns that elevated inflation might persist longer than initially anticipated.
For ECB officials, this situation poses a potential challenge, as it becomes difficult to justify the cessation of interest rate hikes when the market indicates expectations of inflation remaining above the central bank’s targeted 2% threshold. This scenario contrasts with the United States, where although inflation expectations are elevated, they haven’t reached new highs in the past year.
Although the attainment of the ECB’s targeted inflation is expected to materialize around 2025 within the 20-nation currency bloc, projections suggest a significant deceleration in the latter part of this year, as conveyed by Philip Lane, the Chief Economist of the ECB.
A reversal of these pressures would offer a positive outcome for the region’s economy, which is currently contending with a slowdown primarily driven by Germany. Fabio Panetta, a member of the ECB Executive Board, cautioned in the past week that monetary policy needs to exercise prudence to control inflation without causing unnecessary harm to growth.
Consumer outlook on the economy has improved slightly
According to the ECB survey, the consumer outlook on the economy has improved slightly. They anticipate a shrink of 0.6 percent over the upcoming 12 months, a marginal improvement from the 0.7 percent forecast in May.
The survey results also indicated that despite being historically low, unemployment is projected to be at 11 percent one year from now, aligning with consumer sentiments expressed in May. Meanwhile, forecasts for nominal incomes rising by 1.2 percent remain consistent with the previous survey.
Concurrently, consumers anticipate a 2.1 percent increase in home prices within the next 12 months, stabilizing at a level seen over the past two years. Additionally, expectations for mortgage interest rates in the next 12 months have slightly decreased to 5 percent from the previous figure of 5.1 percent in May.
According to Piet Christiansen, who serves as the chief strategist at Danske Bank A/S, these indicators are “crucial,” currently, none of them aligns with the notion of a pause in policy adjustments come September. Christiansen further emphasized that lingering worries persist regarding inflation expectations.