Long-term inflation expectations of consumers: an overview

Prepared by Pedro Baptista, Colm Bates, Omiros Kouvavas, Justus Meyer and Katia Werkmeister

The measures of inflation expectations published in the ECB Consumer Expectations Survey (CES) have, starting with the April 2025 data release, been complemented with a new measure of five-year-ahead inflation expectations. Previously, going back to April 2020, the CES only set out monthly measures of consumers’ short-term (one year ahead) and medium-term (three years ahead) inflation expectations. While expectations for inflation three years ahead are of particular importance for assessing medium-term inflation risks, starting in August 2022, the CES added a five-year-ahead expectations measure to augment the ECB’s ability to monitor longer-term inflation expectations.^[1],[2] This box examines developments in these long-term (five years ahead) inflation expectations and their use for assessing the degree to which inflation expectations are anchored.

Despite the inflation surge in the euro area following the post-pandemic reopening of the economy and Russia’s unjustified invasion of Ukraine, long-term inflation expectations have stayed close to the ECB’s 2% target. The median expectations of the annual rate of inflation five years ahead have remained remarkably stable since 2022, at around 2.1%, having declined from initial highs of 2.3% in August 2022, when inflation stood at 9.1% (Chart A, panel a). A similar pattern can be observed for the mean expectations (Chart A, panel b).^[3] The downward-sloping term structure of these indicators, in addition to stable five-year-ahead expectations, demonstrates that consumers have been clearly expecting the inflation rate to move closer to the ECB’s target over time, thus showing that inflation expectations have remained well anchored.

Consumers’ longer-term inflation expectations are more centred around the ECB’s medium-term inflation target than shorter horizons. Comparing the entire distribution of inflation expectations across the three-year and five-year horizons (Chart A, panel c), a large share of respondents’ longer-term expectations lies close to the ECB’s 2% inflation target. However, a substantial share of consumers’ longer-term expectations also lies below the target and displays a sizeable right tail (Chart A, panel c). Both distributions are centred around the 2% target, with their respective peaks becoming more pronounced as euro area inflation rates decreased between 2022 and 2024. Notably, in both August 2022 and February 2025, the concentration around the 2% target is higher for five-year-ahead inflation expectations than for three-year-ahead expectations. The lower median of five-year inflation expectations than of three-year expectations also reflects a slightly higher incidence of zero inflation expectations at the longer horizon.^[4] As inflation receded, the share of longer-term inflation expectations around the target increased (Chart B, panel a).^[5]

The CES also directly asks respondents about the likelihood of the ECB maintaining price stability over three-year and five-year horizons. This provides a quantitative measure of the ECB’s credibility from a consumer perspective and helps to further evaluate the anchoring of longer-term expectations.^[6] Chart B, panel b) compares the perceived probability of the ECB maintaining price stability over the next five years with the quantitative five-year-ahead expectations.^[7] In addition, respondents with expectations nearer the ECB’s target (between 1.5% and 2.5%) also show higher confidence in the ECB’s ability to maintain price stability, with a mean likelihood of 48.5%. In contrast, long-term inflation expectations below 1.5% or above 2.5% point to lower mean perceived likelihoods, at 39.1% and 37.7%. This suggests that deviations of long-term inflation expectations from the 2% target correlate with reduced confidence in the ECB’s ability to steer inflation in the medium term.^[8] Chart C, panel a) shows the positive correlation between the probability of having five-year-ahead expectations at around the 2% target and the belief that the ECB will be able to maintain price stability over the next five years. The estimated coefficients increase linearly, indicating that, as respondents’ belief in the ECB’s ability to maintain price stability strengthens, the respondents are more likely to expect longer-term inflation to stay near the target.

Consumers’ long-term inflation expectations show lower sensitivity to inflation surprises than their medium-term expectations. Inflation surprises are defined as the difference between an individual’s short-term expectation of inflation one year ahead and their perception of past yearly inflation reported one year later. During the 2022-23 inflation surge, consumers adjusted their longer-term inflation expectations relatively less in response to these surprises compared with their expectations over the following 12 months, as shown by the decreasing coefficients of a regression depicted in Chart C, panel b). This suggests that consumers paid noticeably less attention to the signal from inflation surprises to form their long-term expectations.

Looking ahead, monitoring inflation expectations across different horizons will enhance the understanding of the inflation outlook of consumers. Compared with shorter horizons, measuring five-year-ahead inflation expectations provides additional information about the degree of anchoring of consumer inflation expectations, particularly during times of large and persistent shocks to inflation. The latest CES data on consumers’ longer-term inflation expectations may also further alleviate concerns that, as a legacy of the previous inflation surge, the euro area might risk permanently higher inflation rates through longer-term inflation expectations drifting away from the ECB’s 2% target.