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Shopping in the supermarket: Inflation is causing problems for many consumers

Photo: Martin Wagner / IMAGO

Inflation in the euro area is likely to remain high for years to come. Although financial experts expect a decline in the coming years, rising wages in particular would maintain pressure on inflation in the euro area. However, inflation is unlikely to return to the European Central Bank's (ECB) target of around two percent until 2025 at the earliest, according to 181 experts in the survey published on Tuesday by the Mannheim-based economic research institute ZEW. On the other hand, falling energy prices and the ECB's tighter monetary policy with a series of interest rate hikes caused some experts to lower inflation expectations.

In the May survey, the financial market experts expect an average currency devaluation of 2023.2024 percent, 2025.5 percent and 8.3 percent for the years 5, 2 and 5. In February, they had estimated the inflation rate for this year to be slightly higher at six percent.

More pessimistic than the ECB

"For the first time since the survey began, the inflation expectations of financial market experts are falling slightly," said economist Frank Brückbauer from ZEW's Research Department Pensions and Sustainable Financial Markets. However, they stabilized at a high level.

With their estimates, the financial experts surveyed are more pessimistic than the ECB, which expects an average inflation rate of 5.3 percent this year. High inflation is a major problem for consumers: it eats away at their purchasing power.

After years of zero and negative interest rates, the ECB has responded to stubbornly high inflation in the euro area with a series of seven interest rate hikes since July 2022 – too late in the view of its critics. The key interest rate, at which commercial banks can obtain fresh central bank money, is now 3.75 percent. Higher interest rates make loans more expensive, which can curb demand and dampen high inflation rates. However, it will take time for the monetary policy mechanism to take effect. In April, the inflation rate in the euro area was seven percent, according to the statistics agency Eurostat. ECB President Christine Lagarde has recently shown determination in the fight against inflation.

In the ZEW survey, a majority of 70 percent of financial experts stated that they had raised their inflation forecasts since February because of wage developments. The green transformation of the economy is also predominantly seen as a driver of inflation. Almost half of the experts had therefore raised their forecast.