Euro zone consumers up 5-year inflation forecast to record high, ECB poll shows

• Five-year inflation expectations rose to 2.4% in December, the highest since the survey began in 2022, up 20 basis points from November
• Near-term expectations remained elevated at 2.8% for 12 months ahead (unchanged) and 2.6% for three years (up from 2.5%)
• Consumer expectations now consistently exceed the ECB's 2% target across all time horizons, despite policymakers claiming they are 'in a good place' with inflation control

Summary: Euro Zone Inflation Expectations Rise to Record High

Euro zone consumers have raised their five-year inflation expectations to a record 2.4% in December, according to the European Central Bank's Consumer Expectations Survey released Friday. This represents a 20-basis-point increase from November and marks the highest reading since the survey's inception in 2022.

Key Data Points:

• 5-year inflation forecast: 2.4% (up from 2.2% in November)
• 12-month inflation expectation: 2.8% (unchanged from November)
• 3-year inflation outlook: 2.6% (up from 2.5% in November)
• ECB target rate: 2%

Market Implications:

The rising inflation expectations exceed the ECB's 2% target across all time horizons, presenting a challenge to the central bank's narrative that inflation is under control. ECB President Christine Lagarde has repeatedly stated the bank is "in a good place" after inflation fell to its 2% target, but consumer sentiment suggests otherwise.

However, policymakers may find some reassurance that consumers still expect inflation to decline over the survey's time horizon, trending downward from 2.8% in the near term to 2.4% over five years.

The ECB is expected to maintain its policy rate at 2% for the foreseeable future, though uncertainty surrounding U.S. President Donald Trump's economic policies adds complexity to the outlook. These consumer expectations are factored into ECB policy deliberations and could influence future monetary policy decisions if the upward trend continues.

The persistent gap between consumer expectations and the ECB's target suggests potential challenges ahead for maintaining price stability in the euro zone.