In particular, high energy and food prices make life expensive for people in the euro area. The European Central Bank wants to keep inflation down. But that could take years.
According to financial market experts, inflation in the euro area is likely to remain high for years to come. Although they expect a decline in the coming years, the inflation target of the European Central Bank (ECB) will probably not be reached until 2025 at the earliest, according to a survey by the Mannheim-based economic research institute ZEW.
In particular, the 181 financial experts surveyed expect rising wages to put pressure on inflation in the euro area. On the other hand, falling energy prices and the tighter monetary policy of the ECB with a series of interest rate hikes caused some experts to see inflation expectations falling.
In the May survey, the financial market experts expect average inflation rates of 5.8 percent, 3.5 percent and 2.5 percent for the years 2023, 2024 and 2025. In February, the experts had estimated the inflation rate for this year at 6 percent. For comparison: the ECB sees its goal of stable prices in the medium term at an inflation rate of two percent.
ECB is more optimistic
“For the first time since the survey began, the inflation expectations of the financial market experts have fallen slightly,” said economist Frank Brückbauer from the ZEW Research Department Old-Age Provision and Sustainable Financial Markets. However, they stabilized at a high level.
With their estimates, the financial experts surveyed are more pessimistic than the ECB, which expects an average inflation rate of 5.3 percent this year. High inflation is a big problem for consumers: It saps their purchasing power, people can afford less for one euro.
After years of zero and negative interest rates, the ECB has reacted to persistently high inflation in the euro area with a series of seven interest rate hikes since July 2022 – too late, according to its critics. The key interest rate at which commercial banks can get fresh central bank money is now 3.75 percent.
Higher interest rates make loans more expensive, which can curb demand and curb high inflation rates. However, it takes time for the mechanism of monetary policy to take effect. According to the statistics agency Eurostat, the inflation rate in the euro area was 7 percent in April. ECB President Christine Lagarde has recently shown her determination in the fight against inflation.
In the ZEW survey, a majority of 70 percent of financial experts said they have raised their inflation forecasts since February because of wage developments. The green transformation of the economy is also predominantly seen as a driver of inflation. Almost half of the experts have therefore raised their forecast. According to 48 and 39 percent respectively, the development of energy prices and the monetary policy of the ECB will have a dampening effect on inflation.
Source: Stern
