ECB survey sees moderating inflation, rising wage expectations

Inflation expectations among eurozone consumers dropped in January but expectations for wage growth continued to rise, adding to fears wage growth will slow efforts to control prices, a European Central Bank survey showed on Tuesday.

Overall inflation is now falling relatively quickly but underlying price pressures are continuing to build, in part driven by quick nominal wage growth in services, suggesting that price growth could remain far more stubborn than the ECB now expects.

Inflation expectations for the next 12 months eased to 4.9 per cent from 5.0 per cent a month earlier while expectations three years out fell more sharply, to 2.5 per cent from 3 per cent, according to median estimates from around 14,000 consumers in six of the euro zone’s biggest economies.

Households on average expect their nominal income to rise by 1.3 per cent in the 12 months ahead, a modest increase considering high price growth but that is still above the 1 per cent seen in the December survey.

ECB policymakers see nominal wage growth of around 5 per cent this year, the quickest in years, and a potential headache when setting interest rates.

While wages are still just catching up after a big real income drop, the 5 per cent rate is still inconsistent with getting inflation down to 2 per cent, so the catch-up itself is expected to prolong inflation and make it more difficult for the ECB to hit its target.

The bank has raised rates by 300 basis points since July and promised another 50 basis points more in March. Markets now see more than 100 basis points of hikes in subsequent meetings before the deposit rate plateaus at or just above 4 per cent.