FRANKFURT, March 27 - Euro-area consumers entered the period before the U.S.-Israeli war on Iran with somewhat lower inflation expectations, according to the European Central Bank's latest Consumer Expectations Survey published on Friday.
The survey's median forecasts for inflation fell to 2.5% for both the next 12 months and the three-year horizon, down from 2.6% recorded a month earlier. Expectations for inflation five years ahead remained steady at 2.3%.
The ECB pointed out that almost all of the responses - 97% - were gathered prior to the outbreak of the conflict on February 28. That timing is significant because the central bank has since revised its outlook sharply upward in response to a run-up in energy prices.
In the weeks following the survey period, the ECB adjusted its inflation projections to reflect rising energy costs. The central bank's scenario analysis now shows inflation exceeding 3% at its peak under the most benign scenario. Under the ECB's adverse and severe scenarios, price increases are projected to be both larger and more persistent.
Other contemporaneous surveys have signaled a deterioration in consumer sentiment on prices and a renewed acceleration in inflation measures, the ECB noted. The combination of survey timing and subsequent market moves means the published consumer expectations capture household sentiment prior to a significant geopolitical shock and the ensuing energy-price response.
For policy watchers and market participants, the contrast between the pre-conflict survey results and the post-conflict inflation projections underscores how quickly external shocks can alter the inflation trajectory implied by household expectations and official forecasts.
Summary
The ECB's Consumer Expectations Survey showed a decline in median inflation expectations to 2.5% for one- and three-year horizons, with five-year expectations unchanged at 2.3%. Nearly all responses were collected before the war that began on February 28, and the ECB has since raised its inflation projections amid surging energy costs, with its benign scenario peaking above 3% and adverse scenarios indicating larger, longer price surges.