The euro area has faced an exceptionally challenging environment over recent years, with high inflation affecting both households and firms.
We can now see, however, that our efforts to bring inflation down have been effective. Inflation has fallen markedly from its peak of 10.6% in October 2022. It fluctuated in a narrow range around 2% in the second half of last year and stood at 1.7% in January. The ECB’s decisive monetary policy response played a crucial role in bringing inflation back to target.
However, even though inflation has declined, surveys show that many citizens still perceive prices to be rising faster than the official data suggest.
This gap between measured and perceived inflation is not merely a statistical curiosity – it is a historical and global regularity. And it has implications for economic decisions and for trust in institutions – trust that helps anchor inflation expectations.
Today’s discussion is therefore timely and relevant. Before turning to the topic of inflation perceptions, I will start by outlining our assessment of the euro area economy and our monetary policy stance.
The euro area outlook and the ECB’s monetary policy
The economy is estimated to have grown by 0.3% in the fourth quarter of last year and by 1.5% in 2025 as a whole – better than what was projected for 2025 at the start of that year.
Growth in the fourth quarter was primarily driven by domestic demand, with services activity – especially in the information and communication sector – playing a key role. Manufacturing has been weaker, but overall still resilient to the impact of higher tariffs and geopolitical uncertainty, while construction is gradually gaining momentum.
In the period ahead, activity is expected to be supported by rising labour income amid a resilient labour market, as well as investment in defence, infrastructure and digital technologies. At the same time, the trade environment remains challenging owing to higher tariffs, a stronger euro and a persistently volatile global policy environment.
Inflation declined to 1.7% in January, from 2.0% in December, owing to lower energy and services inflation. Core inflation – excluding energy and food – eased to 2.2%, after 2.3% in December.
With inflation lower than nominal wage growth, real wages – wages that are adjusted for inflation – have not only recovered but have on average risen above levels seen in early 2021. Wage growth remains elevated but has eased gradually and is expected to continue to moderate to around 3% in the medium term.
We continue to expect inflation to stabilise at our 2% target in the medium term. We therefore decided to keep the three key ECB interest rates unchanged at our monetary policy meeting earlier this month.
Looking ahead, we will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular interest rate path.
The divergence between actual and perceived inflation
Let me now turn to your chosen topic – the divergence between actual and perceived inflation – and why it matters for our mandate.
Inflation perceptions describe people’s beliefs about recent price changes. While these perceptions tend to move with measured inflation, they are typically higher.[1] This is a global phenomenon and is not unique to the euro area.[2]
Since the launch of the ECB’s Consumer Expectations Survey in April 2020, perceived inflation in the euro area has, on average, exceeded measured inflation by 1.2 percentage points. Inflation perceptions increased in 2021 and 2022, in line with measured inflation, and have since declined substantially.[5]
Inflation perceptions matter for three reasons.
First, perceptions directly influence economic behaviour. When people believe prices are rising faster, they may adjust their consumption and saving decisions, as well as their wage demands, in response. This, in turn, can affect aggregate economic activity and inflation dynamics.
Second, perceptions of current inflation shape expectations about future inflation.[6] We monitor these expectations closely for any signs of a sustained deviation from our 2% medium-term target.
Comments
Post a Comment