Quick overview

---

A European Central Bank survey showed a sharp increase in consumers’ inflation expectations for the year ahead, alongside growing pessimism about the economy.

The data adds pressure on policymakers as Europe continues to grapple with the energy shock triggered by the war in Ukraine.

Consumers across the eurozone sharply raised their inflation expectations in March, according to a key survey released by the European Central Bank, reinforcing pressure on the central bank ahead of its next monetary policy meeting.

The survey showed that inflation expectations for the next 12 months climbed to 4.0%, up from 2.5% in February. The sharp increase reflects the persistent impact of higher energy costs linked to the war in Ukraine.

Medium-term expectations also moved higher. Consumers now expect inflation to reach 3.0% over the next three years, compared with 2.5% projected the previous month. Both figures remain well above the ECB’s 2% inflation target.

The only relatively moderate signal came from longer-term expectations. Inflation forecasts for the next five years edged up only slightly, from 2.3% to 2.4%, potentially offering some reassurance to policymakers.

ECB Watches for Second-Round Effects

Inflationary pressures in the eurozone intensified after the spike in energy prices caused by the conflict in Ukraine. Against that backdrop, the ECB is closely monitoring whether the initial shock begins feeding into wages, consumer behavior, and corporate pricing decisions—so-called second-round effects.

This scenario is particularly concerning for policymakers because it could make inflation more persistent and force the central bank to maintain tighter monetary policy for longer.

Markets widely expect the ECB to leave interest rates unchanged at Thursday’s meeting. However, analysts believe the institution will maintain a hawkish tone and leave the door open to future rate hikes if broader inflationary pressures continue to spread.

Growing Economic Pessimism

The survey also revealed worsening growth expectations among European households. Consumers now forecast a 2.1% contraction in the economy over the next 12 months, compared with the 0.9% decline expected in February.

The shift highlights rising concern over the impact of higher energy costs, declining purchasing power, and ongoing geopolitical uncertainty.

Income expectations remained broadly stable compared with the previous month. However, spending growth expectations rose from 4.6% to 5.1%, suggesting households anticipate continued increases in living costs in the months ahead.

A Key Signal for Markets

The ECB’s consumer survey is closely watched by investors because it offers insight into whether inflation expectations are becoming unanchored. For central banks, preventing that outcome is critical: when households and businesses begin expecting persistently higher inflation, they tend to adjust wages, contracts, and prices accordingly, creating a self-reinforcing cycle.

Against this backdrop, the ECB faces a delicate balancing act between containing inflation and avoiding a deeper economic slowdown that is already beginning to emerge across the region.