What the ECB's May 2025 Consumer Expectations Survey Really Told Us About Inflation

The ECB's subsequent Economic Bulletin confirmed that short-term consumer inflation expectations declined in both May and June 2025, reversing the uptick observed in prior months .

Broader Economic and Policy Context at the Time

The May 2025 CES data did not exist in a vacuum. The broader macroeconomic picture in mid-2025 was one of fading, but still persistent, price pressures.

• Eurozone headline inflation was 1.9% in May 2025, dipping below the ECB's 2% target for the first time since September 2024 . It edged up to 2.0% in June, driven by higher energy prices that were still lower year-on-year but becoming less negative .
• The decline in consumer expectations was attributed to consumers responding to diminishing tensions in the Middle East at the time, before the geopolitical situation later worsened .

Against this backdrop, the prevailing narrative among many economists and market participants was that the disinflation process was on track, and the ECB was not under immediate pressure to raise rates again . The central bank itself had been cutting rates throughout 2025, bringing its deposit facility rate down to 2% by June . The consensus view, as reflected in early June 2025 reporting, was that a further rate cut was more likely than a hike .

The Energy Shock and the Policy Reversal

The easing in consumer inflation expectations in May 2025 proved to be a false dawn. The respite from Middle East tensions ended, and the conflict escalated dramatically, triggering a severe energy price shock.

• By April 2026, eurozone headline inflation had surged to 3.2%, its highest reading since September 2023 .
• This was overwhelmingly driven by a 10.9% year-on-year spike in energy costs, directly linked to the conflict in Iran and its impact on global oil and natural gas prices .
• Core inflation (excluding food and energy) also rose to 2.5% in April 2026, as higher energy costs began to feed through into services .

The rapid deterioration in the inflation outlook forced a dramatic pivot in ECB policy. By late May 2026, with inflation accelerating across the EU's largest economies (Germany, France, Italy, and Spain), markets increasingly expected the ECB to raise interest rates .

The ECB's June 2026 Rate Hike

On June 11, 2026, the ECB's Governing Council raised all three key interest rates by 25 basis points . This was its first rate hike in three years, marking a clear reversal of the easing cycle that had defined its approach throughout 2025 .

In its monetary policy statement, the ECB explicitly cited the Middle East war as the catalyst, stating that the conflict was "generating inflation pressures" and that the decision to raise rates was "robust across a range of scenarios" .

ECB President Christine Lagarde defended the hike, arguing that energy price inflation, which had reached 10.9%, was "broadening throughout the economy" and that this broader inflation outlook was the key driver of the decision .

Policymakers signaled that further action could follow. ECB policymaker Pierre Wunsch kept a further July 2026 hike in play, even as a U.S.-Iran agreement began to ease energy prices, stating that another hike could come if signs of inflation extended beyond energy .

Bottom Line

The May 2025 CES revealed a sharp easing in consumer inflation expectations that, at the time, aligned with a narrative of successful disinflation. However, the subsequent energy price shock from the Middle East conflict completely overrode those expectations. The episode stands as a stark reminder of how vulnerable inflation dynamics — and the policy responses they dictate — are to unpredictable geopolitical events.