Inflation Expectations Retreat In May

Consumers across the euro area lowered their short-term inflation expectations in May, according to the European Central Bank’s latest Consumer Expectations Survey.

Expected inflation over the next 12 months fell to 3.5% from 4.0% in April, while perceived inflation over the previous 12 months remained unchanged at 4.0%.

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Long-Term Outlook Holds Steady

Longer-term inflation expectations were unchanged. Consumers continued to expect inflation of 2.9% three years ahead and 2.4% over a five-year horizon.

The ECB also reported a decline in uncertainty about inflation over the coming year, although it remained above levels recorded before the conflict in the Middle East.

Income Gaps Continue To Shape Sentiment

The survey showed notable differences across income groups. Lower-income households reported higher perceptions of past inflation and higher expectations for future inflation than higher-income respondents.

Age differences were also evident. Consumers aged 18 to 34 reported lower inflation perceptions and expectations than those aged between 35 and 70.

Household Finances Show Mixed Signals

Expected nominal income growth over the next 12 months increased to 1.0% from 0.8% in April. At the same time, expected spending growth eased to 3.8% from 4.3%, while expectations for economic growth improved to -1.7% from -2.2%. Although households continued to expect the economy to contract, the latest reading indicates a less negative outlook than a month earlier.

Labour Market Views Remain Broadly Stable

Consumers expected the unemployment rate 12 months ahead to reach 11.3%, up slightly from 11.2% in April. Expectations differed across income groups, with lower-income households forecasting unemployment of 13.7%, compared with 9.5% among higher-income respondents.

The expected unemployment rate remained only slightly above the perceived current rate of 10.7%.

Housing And Credit Conditions Stay Tight

Consumers expect house prices to increase by 3.6% over the next year, compared with 3.7% in April. Expectations for mortgage interest rates were unchanged at 4.9% for the third consecutive month.

Lower-income households continued to expect higher mortgage rates than higher-income households, at 5.6% and 4.4% respectively.

The survey also showed that the net share of households reporting tighter access to credit over the previous 12 months reached its highest level since February 2024. At the same time, fewer respondents expected credit conditions to tighten further over the coming year.