Euro-area consumers' inflation expectations rose sharply in March, according to a European Central Bank survey [1].
This shift in consumer sentiment is critical because policymakers fear that high energy costs could make rapid price growth self-perpetuating. If consumers believe prices will continue to rise, they may demand higher wages or change spending habits in a way that further fuels inflation.
Households now expect consumer prices to rise by 4% over the next 12 months [5]. This represents a significant jump from the 2.5% expectation seen in February [5]. The rise in expectations is attributed to the knock-on effects of the Iran war and rising energy costs [4, 6].
Actual inflation in the euro zone jumped to 2.5% in March from 1.9% in February [7]. This figure was slightly lower than the 2.6% reading that economists polled by Reuters had expected [8].
Reuters said that the ECB survey indicated a worry for policymakers who fear that high energy costs could push up expectations and make rapid price growth self-perpetuating [2].
Consumers across the board experienced a sharp increase in their inflation bets [3]. The ECB survey serves as a primary indicator of where residents see prices in a year's time [1].
Energy costs remain a primary driver of this economic instability. The volatility in energy markets—driven by geopolitical tensions in the Middle East—continues to put pressure on the price of goods and services across the European continent.
“Households now expect consumer prices to rise by 4% over the next 12 months.”
The divergence between actual inflation (2.5%) and consumer expectations (4%) suggests a gap in public perception. This indicates that while current price increases are slowing relative to expectations, the public expects a future shock. The ECB is now facing a pressure to maintain high interest rates to prevent these expectations from becoming entrenched in the economy, which would lead to a wage-price spiral.
