Euro-zone households reduced their short-term inflation outlook in May and left medium- and longer-term expectations unchanged, according to the European Central Bank's Consumer Expectations Survey released on Friday. The change comes as policymakers weigh whether more monetary tightening is required after the ECB raised its deposit rate earlier this month.
The survey reported that consumers lowered their expected rate of price growth over the next 12 months to 3.5% in May from 4.0% in April. Expectations for inflation three years ahead remained at 2.9%, while the five-year expectation stayed at 2.4%.
The ECB noted that uncertainty surrounding inflation expectations for the coming 12 months eased in May but remained elevated relative to the period before the start of the war in the Middle East. Those observations are based on responses from about 19,000 adults across 11 euro-zone nations, the bank said.
Patterns within the survey data were consistent with past findings: respondents in lower income brackets continued to report higher inflation perceptions and expectations than other groups, while younger respondents tended to report lower inflation perceptions and expectations.
Market pricing reflects some remaining scope for further policy tightening. Financial markets are currently assigning probabilities consistent with between one and two additional rate hikes, and traders do not fully price in the next ECB move until the autumn, the survey release noted.
Beyond inflation expectations, consumers turned somewhat less negative on near-term economic activity. The survey's measure of expected overall growth for the year ahead improved to a predicted contraction of -1.7%, compared with a 2.2% decline reported a month earlier.
On household finances, income expectations picked up modestly in May, but expectations for unemployment also rose, indicating mixed signals on households' views of the labor market.
Context for policymakers - ECB officials have debated further tightening since the bank lifted its deposit rate earlier this month, with some arguing for additional hikes to anchor price expectations and others calling for caution on timing. The mixed signals in the survey - lower near-term inflation expectations but continued uncertainty and higher unemployment bets - leave the timing of any further rate moves unresolved.