Eurozone consumers lowered their near- and medium-term inflation expectations to the lowest levels in more than two and a half years in August, according to the European Central Bank's (ECB) monthly Consumer Expectations Survey released on Friday, bolstering the case for policymakers to deliver back-to-back interest rate cuts at their October 17 meeting.
The survey of approximately 19,000 adults across 11 euro area nations showed that median inflation expectations for the next 12 months declined to 2.7% from 2.8% in July—the lowest reading since September 2021. Even more encouragingly for Frankfurt rate-setters, median expectations for inflation three years ahead fell from 2.4% to 2.3%, marking the lowest level since February 2022.
Three-Year Consumer Price Outlook Reaches Lowest Level Since Early 2022
Perceptions of past inflation over the preceding 12 months also moderated noticeably, dropping to 3.9% from 4.1% in July. At the same time, surveyed households anticipated nominal income growth of 1.2% over the coming year while expecting the broader Eurozone economy to contract by 0.9%, underscoring persistent caution over industrial weakness in Germany and Italy.
The ECB survey coincided with sharper-than-expected national inflation declines released on Friday by statistical agencies in France and Spain. French harmonized consumer price inflation plunged to 1.5% in September from 2.2% in August, while Spanish headline inflation dropped to 1.7% from 2.4%—putting two of the currency bloc's four largest economies decisively below the ECB's 2% target.
“Euro area consumers now perceive inflation over both the one-year and three-year horizons as steadily converging toward the Governing Council's two percent medium-term objective.”
Sub-Two-Percent Prints in France and Spain Cement October Easing Bets
Having already lowered the benchmark deposit facility rate by 25 basis points in June and again in September to 3.50%, ECB President Christine Lagarde and Governing Council members had initially signaled a gradual quarterly pace of easing tied to updated staff macroeconomic projections.
However, following Friday's combination of anchored household expectations, sub-2% inflation readings in France and Spain, and contracting eurozone private-sector PMI activity, European interest-rate swaps jumped to price in more than an 80% probability of another 25-basis-point cut to 3.25% in October.
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