European Central Bank monitors slowing inflation and wage growth

Inflation expectations in the Eurozone showed a slight decline in July, with the 12-month forecast dropping to 2.9%. According to the European Central Bank (ECB) Consumer Expectations Survey, the median inflation estimate for the previous 12 months fell to 3.5% from 3.6% in June. Three-year inflation expectations also decreased to 2.7%.

Despite the decline in expectations, uncertainty regarding future prices remains higher than levels seen before the conflict in the Middle East. Consumers report that income growth is expected to lag behind spending, with nominal income growth expectations for the next 12 months limited to 1%.

ECB Governing Council member Mārtiņš Kazāks stated that the central bank is well-positioned to act if necessary to return inflation to the 2% target. While the economy has shown resilience with strong second-quarter growth and low unemployment, inflation remains near 3%.

Data also indicates a slowdown in wage growth within the Eurozone. Collective agreement-based compensation rose by 2.44% annually in the second quarter, down from the previous quarter's 2.56% and significantly lower than the 5.55% peak seen in early 2024. This deceleration provides the ECB with more room to evaluate future interest rate decisions.