Inflation expectations at lowest level in last three years

The results of M&G YouGov Inflation Expectations Survey fielded in Q4 2015 show that UK consumer inflation forecasts have, once again, edged down over both one- and five-year terms. The median consumer gauge of inflation for the year ahead has lowered from 1.5% to 1.0%, which is the lowest level recorded since the inception of our survey. Over five years, expectations have slid by -0.1% to 2.5%. The expectations for net income in Britain have taken a positive shift in recent months with 22% of UK consumers expecting a rise in take home pay over the next twelve months.
Within Europe, quarterly inflation expectations appear to have stabilised in Germany, Austria and Italy but have slipped in Spain and Switzerland, the only two EU countries to have experienced six consecutive quarters of zero or negative inflation. Over the long-term all surveyed countries still expect inflation to run at or above 2% suggesting European consumers remain broadly confident that central banks will deliver on their price stability mandates.
While recent weakness in European inflation (HICP 0.1% yoy) is largely a consequence of cheaper energy prices, it has nevertheless been adding pressure on the European Central Bank (ECB) to bolster stimulus to avert further downside or even deflation. As quantitative easing (QE) was launched in January 2015, the principal transmission mechanism was intended to be a weaker currency, much of which preceded the announcement. However, some of these benefits have since been offset by the 7% appreciation in trade-weighted euro between March and September 2015. 

In Germany, the survey finds inflation expectation remain stable at 2% over one year and 3% over five years. However, at a regional level, Berlin has experienced rising2 expectations for the last three quarters and has now caught up with the national long-term average. Similarly, income expectations have been rising faster3 in Berlin compared to the rest of Germany, with around 32% of consumers expecting a rise in net income next year compared to the German national average of 23%. Support for government economic policy is hovering around 20% and is unchanged from the previous quarter. One of the regions that shows increasing support for government policy is Bavaria where 21% of respondents “strongly” or “tend to agree” compared to 16% six months ago. This is interesting, considering the region is one of the most affected by the ongoing refugee crisis.

Switzerland has been experiencing deep deflation for the last three quarters, as the weakening euro has been putting the alpine exporting nation increasingly under pressure. The Swiss National Bank itself announced in its September statement that deflation is expected to last until 2017, after which inflation should move back into positive territory. Against this backdrop, we find that Swiss consumer inflation expectations have dropped by -0.3% over one year (currently 1.0%) and by -0.5% in the medium term (currently 2.0%). In spite of this, within Europe, Swiss consumers retain the highest level of confidence in their central bank, as evidenced by our survey, with 51% of Swiss households declaring to be “very” or “fairly confident” the SNB will achieve price stability in the medium term. This level, however, is lower than the one observed one year ago (60%).