Eurozone | Inflation expectations are rising, not spiraling

Eurozone inflation is set to push above the ECB’s 2% target for the first time since 2018. But we think higher near-term inflation is unlikely to stick unless expectations shift up a gear. Our new gauge of long-term inflation expectations is below both the 2% target and pre-pandemic levels, suggesting the current burst is more a welcome sign of reflation rather than a threat to price stability.
What you will learn:

• The ESI survey shows price expectations across the eurozone are rising above the long-term average after a sharp drop in 2020. But our analysis suggests that this effect is largely limited to the short term, while longer-term measures of expected inflation are holding lower.
• The rise in expectations is also less sharp among consumers than businesses. Firms are signalling much higher selling prices, while consumer expectations are more restrained and consistent with current inflation trends.
• Simulations using our Global Economic Model show that while a sustained upward shift in inflation expectations might trigger an earlier tightening of ECB policy, only a rapid and sustained upward spiral of expectations would see the policy rate float significantly above our baseline in five years’ time.