Euro area consumers became slightly more optimistic about inflation and economic growth in July, although the latest European Central Bank (ECB) survey comes as Cyprus continues to face significantly stronger price pressures than the wider euro area.

The ECB has reported that median consumer expectations for inflation over the next 12 months fell to 2.9 per cent in July from 3 per cent in June.

Expectations for inflation over the following three years also eased, to 2.7 per cent from 2.8 per cent, while expectations five years ahead remained unchanged at 2.4 per cent.

Consumers’ perception of inflation over the previous 12 months also edged down, from 3.6 per cent to 3.5 per cent.

The latest figures provide some reassurance that inflation expectations remain relatively contained across the euro area, although uncertainty surrounding the outlook remains elevated.

The ECB said uncertainty about inflation expectations over the next 12 months was unchanged and remained above the level recorded before the start of the war in the Middle East.

Lower-income consumers continued to report higher perceptions and expectations for inflation than higher-income households, while younger respondents aged 18 to 34 continued to report lower inflation perceptions and expectations than older consumers.

The figures have particular relevance for Cyprus, where annual inflation reached 4.4 per cent in July, according to Eurostat and the Cyprus Statistical Service (Cystat).

That put Cyprus and Bulgaria jointly third among EU member states for annual inflation, behind Romania at 8.2 per cent and Lithuania at 5.4 per cent.

The Cyprus rate was substantially above both the 2.9 per cent euro area average and the 3 per cent EU average in July.

Prices in Cyprus increased particularly sharply in restaurants and accommodation services, which were 12 per cent higher than a year earlier.

Housing, water, electricity, natural gas and other fuels recorded a 7 per cent annual increase, while energy prices overall rose by 10.2 per cent.

Cyprus has therefore entered the second half of 2026 with domestic inflation running considerably faster than the euro area rate, even as European consumers’ expectations have eased.

Income growth weakens

The ECB survey also found that consumers had become slightly less optimistic about their income prospects.

Expected nominal income growth over the next 12 months fell to 1 per cent from 1.1 per cent in June.

By contrast, perceived nominal spending growth over the previous 12 months remained unchanged at 5.1 per cent.

Expected spending growth over the coming 12 months was also unchanged at 3.6 per cent, with consumers in the lowest three income groups anticipating slightly faster spending growth than those in the highest two groups.

The combination suggests that consumers expect spending to continue growing considerably faster than their nominal incomes, although the survey does not directly measure real purchasing power.

Economic outlook improves slightly

Consumers’ expectations for economic growth over the next 12 months became less negative, improving to minus 1.2 per cent from minus 1.4 per cent in June.

However, expectations for the unemployment rate in 12 months remained unchanged at 11.2 per cent.

Lower-income households continued to have the most pessimistic expectations, forecasting unemployment of 13.5 per cent, compared with 9.4 per cent among higher-income households.

Consumers expected the future unemployment rate to be only slightly above their perceived current rate of 10.6 per cent, pointing towards a broadly stable labour market outlook.

There were nevertheless signs of some weakening in labour market sentiment in the quarterly data.

The expected probability of an unemployed person finding a job within three months fell to 30.8 per cent in July, from 32.1 per cent in April.

At the same time, employed consumers reported a higher expected probability of losing their jobs within three months, rising to 9.8 per cent from 8.8 per cent in April.

The developments come as Cyprus is expected to maintain relatively strong economic growth despite the inflationary environment.

The Economics Research Centre of the University of Cyprus has forecast real GDP growth of 2.7 per cent in 2026, down from an estimated 3.8 per cent in 2025.

It expects growth to strengthen to 3.1 per cent in 2027, while forecasting inflation of 3 per cent this year before easing to 2.1 per cent next year.

The centre has attributed the weaker growth outlook and higher inflation partly to the continuing conflict in the Middle East and its effects on energy prices, external demand, confidence and financing conditions.

Housing expectations remain firm

Euro area consumers continued to expect house prices to rise by 3.4 per cent over the next 12 months, unchanged from June.

Expectations varied considerably according to income, with consumers in the lowest income group forecasting house price growth of 4 per cent compared with 3.1 per cent among the highest-income group.

Expected mortgage interest rates over the next 12 months declined slightly, from 5 per cent to 4.9 per cent.

Lower-income households continued to expect the highest mortgage rates, at 5.7 per cent, compared with 4.4 per cent among higher-income households.

The survey also found that the net share of households reporting tighter access to credit over the previous 12 months increased compared with June.

However, the net share expecting credit conditions to tighten over the coming year declined.

The proportion of consumers reporting that they had applied for credit during the previous three months increased to 14.3 per cent in July, from 13.4 per cent in April.

The housing and credit figures come as Cyprus has seen a recent increase in new housing loans, which CypERC has identified as one factor supporting the domestic economy despite wider uncertainty.

Energy remains a key inflation risk

The latest ECB survey comes against continuing concern over energy prices across the region.

Fuel prices in Cyprus rose by 9.9 per cent year-on-year in July, according to Eurostat, although this represented a substantial slowdown from annual increases of 18.6 per cent in June and 20.5 per cent in May.

Across the EU, fuel prices rose by 16.9 per cent in July compared with a year earlier.

The Cyprus figure was therefore considerably below the EU increase, but fuel remained more expensive than a year earlier.

Governor of the Central Bank of Cyprus Christodoulos Patsalides, who sits on the ECB’s Governing Council, previously said the wider effects of the energy shock remained contained but warned that inflation risks continued to point upwards while the Middle East conflict persisted.

“So far, broader effects from the energy shock remain contained,” he said.

“The economic outlook continues to be shaped by heightened geopolitical uncertainty,” Patsalides added.

“Risks to inflation continue to be tilted to the upside, whereas risks to growth remain on the downside,” he added.

“Elevated energy prices are increasing production costs, and the longer the conflict in the Middle East endures, the greater the risk that these pressures broaden and become more persistent,” Patsalides said.

For Cyprus, the divergence between domestic inflation and euro area expectations remains particularly important.

While European consumers are becoming marginally less concerned about future inflation, Cyprus is still recording price increases well above the euro area average.

The July data therefore suggest that inflation expectations across the euro area may be easing, but Cyprus continues to face a more pronounced domestic inflation challenge, particularly in services, housing-related costs and energy.