Euro area consumers and markets are dialing back their inflation forecasts. The European Central Bank's latest Survey of Professional Forecasters shows one-year CPI expectations dropped to 3% from 3.2% in the previous quarter. That's still above the ECB's 2% target, but the decline signals that the worst of the price surge may be behind the bloc.
The survey, conducted quarterly, polls economists and analysts on their outlook for inflation, growth, and unemployment. The 0.2 percentage point drop in the one-year horizon is the first decline in several quarters, suggesting that the sharp rise in energy and food prices is beginning to fade from expectations.
Core CPI: A key measure holds steady
At the same time, market pricing for July's core CPI month-over-month is set at 0.2%, with a 34.1% probability according to data from the ECB. Core CPI strips out volatile food and energy prices, giving a clearer view of underlying inflation trends. The 0.2% figure suggests a modest increase, but the probability attached to it indicates uncertainty among traders.
The 34.1% probability is derived from inflation swap markets, where investors bet on future price movements. It means the market sees a roughly one-in-three chance of a 0.2% month-over-month rise. The remaining probability is spread across higher and lower outcomes, reflecting the range of views on how sticky inflation remains.
What the numbers mean for the ECB
The drop in one-year expectations could give the ECB some breathing room. Policymakers have been watching inflation expectations closely as a guide to whether price pressures are becoming entrenched. A lower reading reduces the urgency for further rate hikes, though the central bank has stressed it will remain data-dependent.
The core CPI reading will be a key input for the ECB's next decision. If the actual July figure comes in at or below 0.2%, it would support the case for a pause. A higher number could reignite fears of persistent inflation.
The ECB's next policy meeting is scheduled for later this month. Investors will be parsing every data point between now and then. The central bank has already raised rates multiple times to combat inflation, and the debate now is whether to hold steady or tighten further.
The combination of lower expectations and a modest core CPI forecast suggests the inflation peak may have passed, but the path back to 2% remains slow. Services inflation, in particular, has been sticky, and wage growth remains elevated in some sectors.
The data will feed into the ECB's deliberations on interest rates. No decision is expected before the meeting, but the numbers will shape the tone of the discussion.
