Eurozone faces inflation drop; target delayed to 2026: ZEW

22 Aug '23

2 min read

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Insights

Eurozone inflation projections are noticeably receding for the first time in a while, according to ZEW Mannheim.
The forecasts point to a gradual decrease in inflation over the coming years, with the ECB's inflation target unlikely to be met until at least 2026.
Financial market experts predict median inflation rates of 5.5, 3.3, and 2.5 per cent for 2023 to 2025.

The eurozone inflation projections of the financial market experts are noticeably receding for the first time in a while, as per ZEW Mannheim. Forecasts point to a gradual decrease in inflation over the upcoming years. However, the European Central Bank’s (ECB) inflation target is unlikely to be achieved until at least 2026.

While many respondents continue to view wage trends in the eurozone with concern, the economic development is increasingly fostering expectations of declining inflation. For the year 2023, the experts do not anticipate any further significant interest rate hikes by the ECB. In 2024 and 2025, ECB interest rates are expected to fall gradually, according to the latest ZEW Financial Market Survey.

In the August 2023 survey, financial market experts predict median inflation rates of 5.5, 3.3, and 2.5 per cent for 2023, 2024, and 2025, respectively. The majority therefore maintains the view that the ECB won’t attain its 2 per cent inflation target during the 2023–2025 period. Nonetheless, inflation projections are now notably receding for the first time in a while. In May 2023, the median projections for the years 2023, 2024, and 2025 were 5.8, 3.7, and 2.5 per cent, respectively.

Continuing from the May 2023 survey, wages remain the primary drivers of inflation. Around 53 per cent of financial market experts say they have raised their inflation forecasts based on the development of wages since May 2023. However, this sentiment is a slight decline from the previous survey, where approximately 70 per cent shared the same view. Concurrently, respondents suggest that the economic situation is playing a moderating role in inflation expectations. Around 47 per cent report that they have lowered their inflation forecasts due to the economic situation.

“Following May 2023, which marked the first time financial market experts didn’t anticipate inflation to climb any further, we now observe a distinct decline in August 2023. While inflation expectations remain at a high level, suggesting that inflation rates are likely to remain well above the ECB’s 2 per cent target until 2025, the past two surveys indicate a turning point,” said Dr. Frank Bruckbauer, a researcher in the ZEW’s Pensions and Sustainable Financial Markets Unit. “Wage developments in the eurozone continue to be a significant driver of inflation. At the same time, the economic situation in the eurozone is somewhat dampening inflationary pressures.”

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