People have become more pessimistic about inflation in the eurozone, betting that price pressures will remain strong for years to come despite them abating for much of the past six months.
The European Central Bank said on Thursday that its latest monthly survey of consumers showed their expectations for inflation next year and in three years had both risen in March further above the central bank’s 2 per cent target, after four months of mostly falling readings.
Those polled now expect eurozone inflation to be 5 per cent in a year’s time, up from 4.6 per cent in the same survey a month ago. In three years, they expect inflation to be 2.9 per cent, an increase from 2.4 per cent in the previous survey.
If people expect price pressures to remain high for longer, it makes them more likely to push for higher wages and accept higher prices, fuelling more inflation.
The ratcheting up of inflation expectations is likely to spook policymakers, making further interest rate rises more likely.
The ECB has already raised rates seven times since the summer to combat the biggest surge in inflation for a generation, leaving the benchmark deposit rate at 3.25 per cent.
While ECB officials think consumers’ inflation expectations tend to be heavily influenced by historic price growth and can be more volatile than those of investors or analysts, economists think the March poll will boost the chances of further increases in borrowing costs.
“As long as inflation, wage growth and inflation expectations remain high and sticky, the ECB is going to err on the hawkish side,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “The main justification would be that the risk of overdoing it is lower than the risk of doing too little.”
Wage growth has been accelerating in the eurozone in recent months, and hourly labour costs in the bloc rose by a record 5.7 per cent in the final quarter of 2022, compared with a year earlier.
Eurozone inflation has fallen from an all-time high of 10.6 per cent in October to 7 per cent in April, but much of that reflects a sharp drop in energy prices.
The price of food, alcohol and tobacco has been rising at double-digit rates since August, and slowed only slightly to 14.9 per cent in the year to April. The price of services, such as restaurants, travel and holidays, is yet to decelerate after increasing 5.2 per cent in April.
ECB president Christine Lagarde told Japan’s Nikkei newspaper this week there were “significant upside risks to the inflation outlook” that meant it still had “more ground to cover” in raising rates, particularly after “wage increases in various European countries”.
For the first time in many years, investors have recently started betting that inflation will stay higher in the eurozone than in the US, based on the closely watched 5-year on 5-year inflation-linked swap rate.
Last week, the ECB said its survey of professional forecasters showed their expectations for inflation had fallen slightly for this year and next year, but had inched up for 2025 to 2.2 per cent.
