Eurozone inflation decline in May as longer-term outlook holds steady

Euro zone consumers reduced their short-term inflation expectations in May while keeping their medium and long-term outlook unchanged, according to a European Central Bank survey released on Friday.

The findings suggest the central bank is not facing immediate pressure to raise interest rates again.

The survey comes after the ECB increased its deposit rate earlier this month to combat elevated inflation.

While some policymakers have argued that further policy tightening may be required to keep inflation expectations under control, the timing of any additional move remains open to debate.

Near-term inflation expectations decline

According to the ECB survey, consumers' median perception of inflation over the previous 12 months remained unchanged at 4.0% in May.

However, median expectations for inflation over the next 12 months declined to 3.5%, down from 4.0% in April.

Meanwhile, expectations for inflation over the next three years held steady at 2.9%, while five-year inflation expectations remained unchanged at 2.4%.

The survey also showed that uncertainty surrounding inflation expectations over the coming year declined.

However, it remained above levels recorded before the start of the war in the Middle East.

The ECB said lower-income respondents continued to report higher inflation perceptions and expectations than higher-income households.

Younger respondents aged 18 to 34 also continued to report lower inflation expectations than respondents aged between 35 and 70.

Income expectations improve as spending outlook softens

The survey indicated a modest improvement in consumers' income outlook.

Nominal income growth expectations over the next 12 months increased to 1.0% in May from 0.8% in April.

Consumers also reported that perceived spending growth over the previous year edged up to 5.4% from 5.3%.

However, expected spending growth over the next 12 months eased to 3.8%, compared with 4.3% in April.

Respondents in the lowest three income groups expected slightly stronger spending growth than those in the highest two income groups.

Economic outlook becomes less negative

Consumers became slightly more optimistic about economic growth over the coming year.

The survey showed that expectations for economic growth improved to -1.7% from -2.2% in April, indicating a less negative outlook.

At the same time, expectations for the unemployment rate in 12 months edged higher to 11.3% from 11.2%.

Lower-income households expected the highest unemployment rate over the next year at 13.7%, while higher-income households expected the lowest rate at 9.5%.

Consumers also continued to expect future unemployment to remain slightly above the perceived current unemployment rate of 10.7%, suggesting that the overall labour market outlook remained broadly stable.

Housing expectations ease

Consumers expected house prices to rise by 3.6% over the next 12 months, down slightly from 3.7% in April.

The survey showed that households in the lowest income group continued to expect stronger house price growth at 4.1%, compared with 3.4% among the highest-income households.

Expectations for mortgage interest rates over the next 12 months remained unchanged at 4.9%, a level that has held steady since March.

Lower-income households expected mortgage rates to reach 5.6% over the next year, while higher-income households anticipated a lower level of 4.4%.

Credit conditions show mixed signals

The ECB survey also pointed to changing perceptions around credit access.

The net percentage of households reporting tighter access to credit over the previous 12 months increased further in May, reaching its highest level since February 2024.

However, the share of households expecting credit conditions to tighten over the next 12 months declined, indicating that consumers see some improvement in future access to credit despite recent tightening.