Euro area inflation expectations fall in May

Median consumer inflation expectations in the Eurozone declined to 2.8% in May 2025, down from 3.1% in April, marking the lowest level in three months. This downward movement suggests that consumers are increasingly confident in the European Central Bank’s (ECB) disinflationary trajectory, with headline inflation gradually retreating from its previous highs. The latest data aligns with ongoing trends of easing supply-side constraints and more stable energy markets across the bloc.

Longer-term expectations also reflected a mild decline in inflation sentiment. Three-year-ahead inflation expectations dipped to 2.4%, slightly down from 2.5%, indicating that consumers foresee inflation gradually converging toward the ECB's medium-term target of 2%. Meanwhile, five-year-ahead expectations remained anchored at 2.1% for the sixth consecutive month, reinforcing confidence that price stability is attainable over the long run.

The survey also highlighted a reduction in inflation uncertainty, suggesting greater clarity among households regarding future price developments. Notably, younger respondents continued to report both lower inflation perceptions and more subdued expectations compared to their older counterparts, likely due to differences in consumption habits, wage structures, and housing costs.

In terms of household financial outlook, expected nominal income growth over the next 12 months rose slightly to 1%, up from 0.9% in April.

While still relatively modest, this uptick may reflect improving labor market conditions and some degree of wage catch-up following recent inflation surges. In contrast, expected nominal spending growth decreased to 3.5% from 3.7%, signaling a potential softening in consumption as households remain cautious, possibly prioritizing savings or debt reduction over discretionary outlays.

Expectations regarding broader macroeconomic conditions also saw a slight improvement. While still in negative territory, economic growth expectations for the next 12 months improved to -1.1% from -1.9%, indicating that consumers are becoming less pessimistic about the outlook, amid signs of resilience in service-sector activity and easing of financial conditions.

Furthermore, expectations for the unemployment rate 12 months ahead declined marginally to 10.4%, from 10.5% in April, suggesting growing confidence in the labor market’s durability, despite economic headwinds.

Overall, the data reflects a tentative improvement in consumer sentiment, with inflation fears easing, income expectations rising, and economic pessimism moderating. These shifts may provide the ECB with some policy flexibility as it gauges the appropriate pace for future rate adjustments in its efforts to balance growth and price stability.