The European Central Bank's latest monthly Consumer Expectations Survey showed a pronounced rise in euro-area consumers' inflation expectations in March, a development that will be closely watched by policymakers concerned that higher energy costs could entrench faster price growth.
Inflation expectations
The survey recorded one-year inflation expectations at 4.0% in March, up from 2.5% in February. Expectations for three years ahead increased to 3.0% from 2.5% over the same interval. Both figures sit well above the ECB's 2% medium-term target. Longer-term expectations, for five years out, were largely stable, moving only to 2.4% from 2.3%.
What the ECB is watching
The bank has been monitoring the fallout from a recent energy price shock. The survey noted that inflation has surged since the war in Iran pushed up energy prices, and officials at the ECB are wary that this shock could produce second-round effects that embed higher inflation into price-setting behavior.
With an ECB policy meeting scheduled for Thursday, the bank is expected to hold interest rates steady for now. However, officials are likely to signal that further rate increases remain a possibility and that they will move if evidence mounts that the initial energy-related shock is becoming embedded in broader inflation dynamics.
Economic outlook and household finances
Alongside inflation expectations, consumers' views on the economy turned more negative. The survey found households now expect a 2.1% contraction for the year ahead, compared with a 0.9% decline a month earlier. Income expectations for the year ahead held steady, showing no change. At the same time, consumers reported higher expectations for spending growth, which rose to 5.1% from 4.6%.
The survey results present a mixed signal for policymakers: near-term inflation expectations have moved materially higher, yet longer-term expectations remain close to target. At the same time, deteriorating growth expectations and stronger intended spending growth add complexity to the policy outlook.