ECB survey adds fuel to rate hike prospects: inflation expectations rise across the board, all above the 2% target

According to Golden Ten Data, the European Central Bank's monthly survey released on Friday shows that eurozone households’ inflation expectations rose across the board in August—adding another layer of basis for the tightening bets that have heated up after the second rate hike on September 10. The median of one-year inflation expectations rose from 2.9% in July to 3.0%, three-year expectations from 2.7% to 2.9%, and five-year expectations from 2.4% to 2.5%. Among them, the three-year indicator is of greater reference value for monetary policy decisions. All three terms are above the European Central Bank's 2% target—meaning that, solely based on household judgment, the idea of "inflation returning to target" is not truly believed within a visible timeframe.

The data supports the market shift seen since the beginning of this month. Last week, the European Central Bank raised the deposit facility rate by 25 basis points to 2.50%, marking the second rate hike since the Iran war broke out and the second one this year, with the main refinancing rate and marginal lending rate adjusted simultaneously to 2.65% and 2.90%.

The survey’s details offer more insight than the three median numbers. According to the European Central Bank’s announcement, in August, household expectations for nominal income growth over the next 12 months remained flat at 1.0%, while expectations for nominal spending growth over the next 12 months also stayed unchanged at 3.6%—with income expectations stuck at 1.0% and spending at 3.6%, the gap indicates that households do not expect their real purchasing power to improve. At the same time, the median perception of inflation over the past 12 months held steady at 3.5%, significantly higher than the actual readings; although inflation expectation uncertainty decreased from July, it remains above levels seen before the outbreak of the Middle East conflict.

Sub-indicators reveal the combination of "inflation rising without labor market deterioration": Expectations for economic growth over the next 12 months remained at -1.2%, meaning households still expect economies in the 21 countries to shrink in the coming year; however, unemployment expectations for 12 months ahead fell from 11.2% in July to 11.0%, only slightly above the perceived current unemployment rate of 10.5%. The European Central Bank interprets this as “labor market prospects being broadly stable.” The lowest-income 20% of households report inflation perception and expectations consistently higher than those of the highest-income group.

The field period for this survey was from August 6 to 24, covering approximately 19,000 adult consumers in 11 eurozone countries; results for September will be released on October 23.

Inflation expectations are not a mere ornament in the European Central Bank’s policy response function. In its post-September decision statement, it explicitly stated that policymakers are closely monitoring expectations—because they shape future wage negotiations and corporate pricing behavior; the three-year indicator is given particular importance as it aligns more closely with wage contract pricing cycles.

Meanwhile, the European Central Bank's own forecasts already illustrate how long the "final mile" will be. According to its latest projection released on September 10, the inflation forecast for 2026 remains at 3.0%, and forecasts for 2027 and 2028 are raised to 2.5% and 2.1%, respectively; growth forecasts are also revised upward, with actual GDP growth expected to be 0.9%, 1.4%, and 1.5% for 2026 to 2028. In effect, the timeline for inflation to return to the 2% target is pushed to around the end of 2027.

Economists and the market have clearly diverged in their judgments of the terminal rate. According to the latest survey, most economists expect the European Central Bank to hold steady at its end-October meeting, followed by a final rate hike of 25 basis points at December’s last meeting of the year to 2.75%, viewing this hike as the last step in this tightening cycle. This outlook is noticeably more hawkish compared to the previous survey—where most analysts saw September’s rate hike as the endpoint.

Rate market pricing is even more aggressive. The rate curve expects deposit facility rates to be around 2.86% by December, rising to about 3.38% by November 2027—meaning the third rate hike (to 3.00%) is fully priced in, and the fourth hike (to 3.25%) is given about a 50% probability; investors are betting “there will be at least three more rate hikes.”