Eurozone inflation expected to gradually decline through 2025: ZEW

31 May '23

2 min read

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The Eurozone's inflation is predicted to decline gradually from 5.8 per cent in 2023 to 2.5 per cent in 2025, according to a ZEW survey.
Experts also predict one more ECB interest rate hike in 2023.
Wage developments and green transformation were key inflation drivers, while energy prices and ECB policies were identified as deflationary factors.

The inflation rate in the Eurozone is expected to remain high but gradually decline over the next few years, according to financial market experts surveyed by ZEW Mannheim. The survey results, published in May 2023, suggest that the European Central Bank's (ECB) inflation target will likely not be achieved until after 2025.

The survey, conducted in February 2023, invited experts to forecast inflation and key interest rate trends in the Eurozone from 2023 to 2025. These experts predict one more interest rate hike by the ECB in 2023, followed by a gradual decrease in 2024 and 2025.

For 2023, the median inflation rate was projected to be 5.8 per cent, falling to 3.5 per cent in 2024 and 2.5 per cent in 2025. This forecast signals that most experts do not anticipate the ECB will reach its 2 per cent inflation target in the specified period. Notably, May 2023 marked the first decrease in inflation expectations for 2023 since the survey's inception, with the median prediction falling from 6 per cent in February 2023, as per ZEW Mannheim.

Wage developments in the Eurozone have been a key concern for a majority of the respondents, with 70 per cent stating they had raised their inflation forecasts based on wage growth since February 2023. Furthermore, 14 per cent of respondents said they had significantly increased their forecasts.

The green transformation of the economy was also identified as a potential inflation driver, with nearly half of the experts revising their predictions upward in response. However, energy prices and ECB monetary policy were largely viewed as having a deflationary impact, with 48 per cent and 39 per cent of respondents respectively noting that these factors negatively influenced their inflation forecasts from February 2023.

“For the first time since the beginning of 2021, financial market experts are not predicting an increase in inflation rates. However, their expectations are stabilising at a high level, meaning that inflation rates are likely to remain well above the ECB's 2 per cent target until 2025. Just as in February 2023, wage developments in the Eurozone were cited as an important inflation driver. However, falling energy prices and the ECB's active interest rate policy are contributing to the fact that some respondents expect inflation rates to be somewhat lower in May 2023 than in February 2023,” said Professor Frank Bruckbauer, advanced researcher in the ZEW Research Unit ‘Pensions and Sustainable Financial Markets.’

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