Brussels, Belgium – The European Central Bank’s latest survey of more than 5,000 companies has revealed positive signs of easing inflationary pressures in the eurozone. The results show that companies expect wage and selling price growth to slow over the next twelve months. This reinforces the assessment that energy price shocks have not yet turned into a chronic inflationary cycle.
Price and wage expectations decline
According to data reported by Reuters, companies lowered their forecasts for selling price increases to 3.2% for next year, compared to 3.5% in the previous survey three months ago. Expectations for non-wage input costs, particularly energy, also saw a significant decline, reaching 5.2% from 5.8% previously. In the labor market, wage growth expectations fell to 2.5% for next year, down from 2.8% in the previous quarter. This trend is considered a “vital development” closely monitored by monetary policymakers, who fear that persistently high inflation could lead to rising wage demands, creating a vicious cycle of price increases that would be difficult to break.
Inflation and monetary target
As for longer-term expectations, companies’ inflation forecasts remained stable at 3% for both one-year and three-year horizons. Meanwhile, five-year expectations saw a slight increase to 3.1%. The actual inflation rate in the euro area continues to hover around 3%, remaining above the European Central Bank’s official target of 2%.
Await the interest rate decision
These results come at a particularly delicate time, as markets prepare for the European Central Bank’s meeting this week. While interest rates are widely expected to remain unchanged at this meeting, continued volatility in oil prices has increased the likelihood of another increase in the deposit rate – currently at 2.25% – at the September meeting. This would occur if inflationary pressures stemming from the energy sector continue to threaten monetary stability. These factors present policymakers with a dilemma: balancing economic growth with the need to contain entrenched inflation.
