An extensive survey of European businesses shows wage and selling-price expectations easing, offering cautious reassurance that the latest energy shock has not yet developed into a broader inflationary spiral.

FRANKFURT — Businesses across the eurozone expect wages and selling prices to rise more slowly over the coming year, providing the European Central Bank with an encouraging signal as policymakers assess whether renewed energy-market pressures require another increase in interest rates.

An ECB survey published on Monday, July 20, found that companies’ expected selling-price growth declined to 3.2 per cent from 3.5 per cent in the previous survey. Anticipated wage growth also fell, dropping to 2.5 per cent from 2.8 per cent. The findings were drawn from responses provided by more than 5,000 companies operating across the currency bloc.

The moderation is significant because European policymakers have been watching closely for evidence that higher energy costs are spreading into salaries, services and consumer prices. Such “second-round effects” could make inflation more persistent, forcing the ECB to maintain restrictive borrowing conditions even as economic growth remains fragile.

Companies reported that expected increases in non-labour input costs—including energy, materials and other operating expenses—had eased to 5.2 per cent from 5.8 per cent. Inflation expectations among businesses remained unchanged at 3 per cent over both the one-year and three-year horizons, although the five-year estimate edged up slightly to 3.1 per cent.

The results offer a mixed but broadly reassuring picture. Firms continue to anticipate inflation above the ECB’s 2 per cent target, yet the decline in wage and pricing intentions suggests that businesses are not responding to the current energy shock with the aggressive price increases seen during Europe’s post-pandemic inflation crisis.

Eurozone inflation slowed to an estimated 2.8 per cent in June, down from 3.2 per cent in May, according to Eurostat. The earlier acceleration had been driven heavily by energy costs, while services inflation also strengthened.

The ECB raised interest rates in June for the first time in nearly three years, describing the move as protection against the risk that higher energy prices could become embedded across the economy. The increase came as geopolitical disruption pushed inflation above target despite subdued underlying growth.

Attention is now turning to the ECB’s policy meeting on July 23. Financial markets and many economists expect the central bank to leave rates unchanged, allowing policymakers more time to determine whether the latest inflationary pressure is temporary or the beginning of a more persistent cycle. A further increase later in the year, potentially in September, remains possible should energy prices continue to rise or inflation spread more clearly into wages and services.

The decision is complicated by Europe’s weak economic momentum. ECB projections published in June forecast euro-area growth of only 0.8 per cent in 2026, followed by an expansion of 1.2 per cent in 2027 and 1.5 per cent in 2028. Export performance is expected to remain constrained by competitiveness problems and declining global market share, leaving household consumption and investment to carry much of the recovery.

Higher interest rates could help prevent another inflationary surge, but they would also raise financing costs for households, governments and companies. That could further discourage investment and consumer spending at a time when several of Europe’s largest economies are struggling to generate sustained growth.

There are nevertheless signs of resilience. The eurozone recorded a current-account surplus of €25 billion in May, up from €17 billion in April. Over the 12 months to May, the surplus reached €272 billion, equivalent to approximately 1.7 per cent of the currency area’s gross domestic product.

For the ECB, the latest corporate survey strengthens the argument for patience. Moderating wage demands and selling-price expectations reduce the immediate danger of an uncontrolled inflation cycle, but they do not eliminate it. Energy markets remain vulnerable to geopolitical disruption, while companies still expect inflation to remain noticeably above the central bank’s target.

The ECB must therefore navigate a narrow path: acting firmly enough to preserve confidence in price stability without imposing unnecessary damage on an economy already characterised by weak growth, hesitant investment and limited room for policy error.