The survey conducted by the European Central Bank reveals that second-order inflation effects are virtually absent in the eurozone. In practical terms, wage increases are not cascading into consumer prices, and businesses no longer anticipate a lasting inflationary spiral. Unprecedented since the 2022 peak. 📉
🔍 What's happening?
In its latest survey report, the ECB notes that secondary inflation mechanisms (those that perpetuate price increases) remain very weak. While wage negotiations did intensify in 2023-2024, they did not trigger the domino effect feared by Frankfurt.
Companies surveyed indicate they are absorbing part of cost increases rather than passing them on entirely to consumers. Inflation expectations among households and businesses are stabilizing around the 2% target.
💡 Why does it matter?
This absence of lasting effects validates the scenario of a soft landing for inflation in the eurozone. For Forex traders, in plain terms, the ECB has room to maneuver to continue its rate-cutting cycle if activity slows too much.
The euro could suffer against the dollar if the Fed maintains higher rates for longer. Currently, EUR/USD is trading around 1.1706, but this monetary policy differential remains a key factor to watch in the coming months.
📊 Our take
For us, the verdict is clear: the ECB won its bet against persistent inflation.
The survey confirms that the monetary tightening of 2022-2023 broke inflation expectations without triggering a sharp recession. Real wages are recovering gradually, company margins are being squeezed slightly, but the economy is holding up. This is exactly the scenario Christine Lagarde has been defending for months. On the European regulatory side, ESMA and national authorities are closely monitoring bond flows and sovereign spreads. Any new stress episode on peripheral debt could force the ECB to slow its rate cuts. But for now, the path looks clear.
We still anticipate two to three 25 basis point cuts by the end of 2026 if European growth remains sluggish. For the French trader: favor EUR/JPY and EUR/CHF pairs, where rate differentials remain favorable to the euro, rather than EUR/USD which risks suffering from the Fed-ECB differential.
✅ Key takeaways
- ECB survey: second-order inflation effects virtually absent
- Inflation expectations stabilized around 2%
- Room for further rate cuts in the eurozone
What do you think? Has the ECB truly tamed inflation, or is this a temporary reprieve before another energy shock?
🔎 Also worth reading
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Source: ECB
