Key Takeaways:
Eurozone households expect 3.5% inflation over the next year, down from 4.0% in April, but longer-term expectations remain stuck above the ECB's 2% target.
The ECB's June rate hike may not be its last: Eurozone households cut their one-year inflation expectations to 3.5% in May from 4.0%, but longer-term views stayed anchored above the 2% target, a survey showed Friday.
"The data continues to suggest that inflation expectations are unanchored relative to the bank's 2% inflation target," Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said in a note.
The ECB's Consumer Expectations Survey of 19,000 adults across 11 eurozone countries, conducted between May 7 and June 1, showed three-year expectations unchanged at 2.9% and five-year views steady at 2.4%. Household income expectations edged up to 1.0% from 0.8%. The survey was taken before news of the tentative US-Iran truce, and oil prices have since fallen below prewar levels, suggesting further declines in near-term expectations may be ahead.
The mixed signals leave the ECB walking a tightrope. The bank raised its key rate by a quarter point on June 11 — the first increase in nearly three years — citing the energy-cost shock from the Iran conflict. With headline inflation still running above 3% across the euro area and GDP growth forecast at just 0.8%, policymakers face the risk of tightening into a slowdown.
ECB Executive Board member Isabel Schnabel, who has tended to favor higher borrowing costs than many of her colleagues, said the bank will need to keep raising rates. "From today's perspective, we will need to raise interest rates further in order to bring inflation back to our 2% target," she told German weekly Die Zeit in an interview this week.
Investors anticipate at least one more quarter-point hike before the end of 2026, according to LSEG data, which also shows an over 50 percent chance of a second increase by year-end. The last time the ECB raised rates in consecutive meetings was in 2023, when it lifted its deposit rate to a record 4.0% before beginning an easing cycle.
Spain's consumer price inflation held at 3.2% in May, with the EU-harmonized measure at 3.6%, showing price pressures persist in the euro area's fourth-largest economy. Transport and energy costs remain the primary drivers, tied to ongoing geopolitical instability in the Middle East.
The improvement in near-term expectations offers some relief that second-round effects — such as higher wage demands — may be contained. The survey showed households expect their incomes to rise at a slightly faster pace of 1.0%, up from 0.8% in April, but still well below the inflation rate, implying continued erosion of real purchasing power.
Before the Iran conflict erupted in early 2026, one-year inflation expectations stood at 2.5%. The current reading of 3.5%, while improved from April's 4.0%, remains a full percentage point above that level, suggesting the energy shock has left a lasting imprint on consumer psychology.
European equities reflected the uncertain outlook. The STOXX 600 fell 0.7% on Tuesday, with the technology sector dropping 3.7% — its biggest daily decline since February — as investors reassessed the implications of higher-for-longer borrowing costs. Chipmakers Infineon and STMicroelectronics declined 6.3% and 8.5%, respectively.
This article is for informational purposes only and does not constitute investment advice.
