In ECB’s Consumer Expectations Survey, consumers’ mean perceived inflation over the past 12 months increased markedly from May’s 8.2% to June’s 8.6%. Median inflation perceptions over the previous 12 months rose from 6.6% to 7.2%.

Mean inflation expectations for 12 month ahead rose from 6.3% to 6.6%. Median inflation expectations for 12 months ahead rose from 4.9% to 5.0%.

Mean economic growth expectations for the next 12 months dropped from -1.0% to -1.3%. Median economic growth expectations was unchanged at 0%.

Full release here.

At a conference today, Joachim Nagel, Bundesbank President and ECB Governing Council member, said that if data in the next six weeks bolster confidence in achieving ECB’s 2% inflation target, he would support a reduction in interest rates in June. However, he emphasized that “such a step would not necessarily be followed by a series of rate cuts.”

He stressed the current climate of uncertainty, noting, “Given the current uncertainty, we cannot pre-commit to a particular rate path.” This approach underscores ECB’s strategy of making decisions “meeting by meeting and based on incoming data.”

Further, Nagel admitted of his reservations and expressed that he is “not fully convinced yet” that price growth is firmly on a path toward target. Core inflation, particularly within the services sector, remains elevated, driven by persistent strong wage growth, which tends to be more durable than goods inflation.

Nevertheless, by June “we will know a lot more,” about the inflation path, he added.

In the account of October 28-29 ECB meeting, it’s noted that “risks surrounding the growth outlook to be clearly tilted to the downside”. The assessment “largely reflected the recent resurgence in COVID-19 infections, the associated intensification of containment measures and the high uncertainty surrounding the timeline of the pandemic and the implications for economic and financial conditions.”

“Given the sharper slowdown in growth momentum and the weakening of underlying inflation dynamics compared with what had previously been expected, as well as the deterioration in the balance of risks, it would be warranted to recalibrate the monetary policy instruments in December.”

However, it’s noted that more than half of the PEPP envelope was still available in case of “renewed market turbulence”. “By the time of the December meeting, updated staff projections would be available and a clearer picture of the dynamics of the pandemic and prospects of a vaccine might have emerged, together with more information on the fiscal policy responses in the euro area.”

Full accounts here.

ECB Chief Economist Philip Lane provided insight into the central bank’s inflation expectations in a speech today. In the near term, headline inflation is anticipated to fluctuate, with a temporary dip in September followed by a rebound later this year.

But more significantly, ECB projects a “rapid decline” in inflation over the next two years, from 2.6% in Q4 2024 to 2.0% in Q4 2025. Core inflation, which is primarily driven by services, is expected to follow a “even sharper” drop, falling from 2.9% at the end of this year to 2.1% by the same period in 2025.

The projections align with weaker economic growth and declining wage pressures, both of which are expected to accelerate the disinflationary process throughout 2025. Lane noted that this slowdown in wage growth is consistent with the recent data, reflecting the end of the “catch-up” dynamics seen in recent years. Additionally, the disinflation process will be supported by well-anchored forward-looking inflation expectations, with reduced price-price and price-wage dynamics compared to the higher inflation environment of 2023.

Looking forward, Lane emphasized that a “gradual approach” in reducing policy restrictiveness will be appropriate, provided the data aligns with ECB’s baseline projection. However, he cautioned that the central bank will “retain optionality” about the pace of adjustment, indicating flexibility depending on future economic developments.

Full speech of ECB’s Lane here.