Eurozone consumer inflation expectations have slightly decreased but remain high. European Central Bank officials warn of the risk of "unmooring".

The European Central Bank's latest survey shows that consumer expectations for future inflation in the euro area saw a slight decline in April, providing some relief to policymakers who are considering further interest rate hikes. However, officials remain increasingly concerned about the possibility of expectations "unanchoring." According to the monthly survey released by the European Central Bank on Monday, respondents expect prices to rise by 2.9% in three years, slightly lower than the 3% in March and lower than the peak of 3.1% reached during the previous surge in October 2022. However, expectations for inflation in the next 12 months stubbornly remain at 4%, and expectations for inflation in five years also remain at 2.4%, continuing to exceed the ECB's medium-term target of 2%. The ECB stated: "The perception and expectations of inflation among the lowest income quintile respondents are slightly higher overall than other groups; while the perception and expectations of inflation among younger respondents continue to be lower than older groups." Despite market expectations for a near-term interest rate hike being clear - policymakers have widely signaled a 25 basis point increase in deposit rates in June - the impact of this survey on market expectations is limited. However, these data may dampen bets on further rate hikes, as the survey shows that there is currently no need for a rapid policy tightening as was seen in 2022 when prices briefly spiraled out of control and ultimately reached double-digit levels. Prior to the release of this data, Isabelle Schnabel, a member of the ECB's Executive Board, issued a warning on Monday, stating that the risk of inflation expectations "unanchoring" is rising. She emphasized that the ECB cannot ignore the surge in energy prices triggered by the conflict in Iran. Last week, this German official described the mid-term inflation expectations that rose in the March survey and the rightward shift in expectations distribution as "worrying." A rightward shift in distribution is commonly seen as an early signal that expectations may deviate from the 2% target. Policymakers are working to prevent the significant volatility in energy markets from more broadly affecting consumer prices. Data scheduled for release on Tuesday is expected to show a further rise in the overall inflation rate in the euro area, with analysts generally estimating a reading of 3.2%. Meanwhile, some policymakers are also concerned about geopolitical conflicts dragging on economic activity. The ECB's survey reflects a growing sense of pessimism: respondents expect a 2.2% contraction in GDP in the next 12 months, exceeding the 2.1% contraction expected in March, while income growth expectations have been lowered from 1.2% to 0.8%. However, expectations for the unemployment rate one year from now have slightly decreased from 11.3% to 11.2%.