According to the European Central Bank’s (ECB) latest Consumer Expectations Survey (CES), Europeans believe that inflation will be around 5% over the next 12 months. This marks a significant increase from the previous month’s median expectation of 4.6%. The poll, which surveyed 14,000 consumers aged 18 and over from six euro area countries, was conducted before the ECB’s decision to raise interest rates by 25 basis points last week.

Uncertainty and Expectations for the Future

The rise in inflation expectations comes amidst uncertainty about inflation expectations 12 months ahead, which reached its highest level since the survey began in April 2020. Furthermore, expectations for inflation over the next three years also increased, from 2.4% to 2.9%. Despite slowing the pace of rate hikes, the regulator argued that underlying price pressures remain strong, signaling further raises are likely.

The CES also revealed that consumers expected their nominal income to increase by 1.3% over the next 12 months, compared to 1.2% in the previous survey. Expectations for nominal spending growth over the next year also increased to 4.1% from 3.9% in February. However, European expectations for economic growth over the next 12 months became slightly more negative, declining to -1.0% from -0.9%. Additionally, the expected unemployment rate for the same time period rose to 11.7% from February’s 11.5%.

Overall, the latest data supports the views of some members of the ECB’s Governing Council who maintain that further rate hikes are warranted by persisting inflation in the eurozone. The ECB uses the results of the CES for policy analysis.

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