Euro zone consumers more hopeful on inflation

[June 06, 2023]  FRANKFURT (Reuters) -Euro zone consumers lowered their inflation expectations, a fresh European Central Bank survey showed on Tuesday, a relief for policymakers after an unexpected surge a month earlier, even if underlying price growth is still likely to be stubborn.

The ECB has raised interest rates by a combined 375 basis points over the past year to arrest runaway price growth and it could still take until 2025 for inflation to slow back to its 2% target as rapid wage growth and robust demand for services keep pressure on prices.

Median expectations for inflation over the next 12 months fell to 4.1% in April from 5.0% in March, while for three years ahead, they dropped to 2.5% from 2.9%, the ECB said, based on a monthly survey of 14,000 adults in the euro zone's biggest countries.

The figures comes as Dutch policymaker Klaas Knot, an outspoken policy hawk, made cautiously optimistic comments on price growth, arguing that the worst of Europe's inflation problems are now in the past.

Still, Knot warned that it could still take some time before inflation, at 6.1% in May, is fully under control.

"Because inflation was high for a long period, underlying inflationary pressures have built up," Knot said in a speech. "It is likely that price pressures in these areas will prove more difficult to bring down."

Still, Knot argued that longer term expectations are still "decently" anchored and there is growing evidence both in financing conditions and macro indicators, that ECB policy is working.

A shopper pays with a five Euro bank note to buy eggs at a local market in Nice, France, April 26, 2023. REUTERS/Eric Gaillard

"It is reassuring to see the first signs of recent monetary policy actually being transmitted to the real economy," Knot added.

A long list of policymakers, including Knot, have argued that the ECB's June rate hike, considered a done deal by most, needs to be followed up by another move in July for inflation to be fully under control.

But the outlook beyond that is murkier. Bundesbank President Joachim Nagel has argued that it is not certain that rates would peak this summer, while his French counterpart Francois Villeroy de Galhau said he thought hikes would end by the close of the summer.

The ECB's consumer expectations survey also included a new nugget that could support arguments for more cautious policy tightening.

Consumers saw more modest wage growth ahead, reduced their unemployment expectations and were less pessimistic about the bloc's growth prospects, even if they still saw a contraction ahead.

(Reporting by Balazs Koranyi;Editing by Bernadette Baum and Sharon Singleton)

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