This box looks at the formation of the euro area inflation expectations captured in the survey on access to finance of enterprises (SAFE). Since June 2023 the SAFE has collected information on euro area inflation expectations for one-year, three-year and five-year horizons.[1] Since March 2024 it has also covered firms’ perceived uncertainty about their five-year inflation expectations.
The short-term inflation expectations of firms are more volatile, also across countries, compared with medium-term and longer-term expectations, which are rather stable over time (Chart A). In June 2023 the median one-year ahead inflation expectations of firms stood at around 5%, reflecting the persistence of high inflation at that time. Gradually, median inflation expectations came down to close to 3% at the one-year horizon, with the dynamics of short-term inflation expectations broadly evolving in line with Harmonised Index of Consumer Prices (HICP) inflation. And yet, heterogeneities across countries still prevail. At the three-year and five-year horizons, firms’ inflation expectations are rather stable and stand at 3%.
Chart A
SAFE inflation expectations
(annual percentages)
Sources: SAFE, Eurostat and ECB calculations.
Notes: This chart shows the survey-weighted median of euro area firms’ expectations for euro area inflation in one year, three years and five years. The statistics are computed after trimming the data at the country-specific first and 99th percentiles. Quarterly SAFE data are for survey rounds 30-34 (January-March 2024 to January-March 2025), and semi-annual data for earlier survey rounds. Euro area HICP refers to the annual rate of growth of the HICP in the euro area.
Inflation expectations are influenced by firm characteristics, by sector and by country of operation across all horizons, while the correlation with actual euro area inflation is highest for the short-term horizon (Chart B). A regression analysis helps identify the main determinants of inflation expectations. It considers factors such as firm demographics (including age, size, exporter status, ownership and past turnover trends), future business decisions related to investment, employment and turnover and euro area inflation rates, and the industry and country of operation of the firms.[2] Firm-specific factors aim to capture firm fundamentals and serve as a proxy for how informed a firm is, whereas industry and country fixed effects account for the broader macroeconomic environment influencing the firm.[3]
The analysis reveals that smaller, younger and non-exporting firms, along with those in the service and construction sectors, tend to expect higher inflation at the one-year, three-year and five-year horizons. This is likely related to the fact that small firms often have limited information when forming their expectations and are also less exposed to international markets.[4] Considering all survey rounds, among major countries, firms in Germany report higher inflation expectations on average than those in other euro area countries. In addition, firms across all countries consistently report a positive relation with realised euro area inflation across all horizons, with the strength of the relationship being highest for the short-term horizon.
Chart B
Determinants of firms' inflation expectations at different horizons
(percentage points)
a) One-year ahead
b) Three-year ahead
c) Five-year ahead
Sources: SAFE, Eurostat and ECB calculations.
Notes: This chart shows the coefficient estimates from regressions of the one-year, three-year and five-year ahead inflation expectations for the covariates indicated on the y-axis. The covariates are all measured as dummy variables except from the euro area HICP. SMEs are firms with less than 250 employees and “increase” signals a dummy variable equal to 1 if firms report an increase in a specific factor, and 0 otherwise. For the country variable, the omitted category includes all other euro area countries, while for sector, the omitted category is trade. Euro area HICP is the annual rate of growth of the Harmonised Index of Consumer Prices in the euro area. Whiskers show 95% confidence intervals. Estimation is based on the survey rounds 30-34 (quarterly data from January-March 2024 to January-March 2025), and semi-annual data for earlier survey rounds.
Most of the variation in inflation expectations across all horizons can be attributed to individual firm characteristics, followed by country-specific factors (Chart C). An additional step in analysing inflation expectations is determining how much of their variation can be attributed to the factors identified above.[5] On average, across horizons and over time, firm characteristics contribute to most of this variation (62%), while the contribution of country fixed effects is 21%. Expectations about future business decisions and industry affiliation account for a similar percentage, each contributing less than 10%. Examining trends across survey rounds: in September 2024 country fixed effects and expectations about investment and employment temporarily had increased influence on inflation expectations for short-term and medium-term horizons. In contrast, the relative importance of factors influencing inflation expectations over longer horizons showed greater stability over time.
Chart C
Main drivers of inflation expectations of firms over time
(percentages)
Sources: SAFE and ECB calculations.
Notes: This chart shows the decomposition of the adjusted R-squared of regressions in Chart B using Shapley values. For a description of the variables see the notes to Chart B. Estimations are based on the survey rounds 30-34 (quarterly data from January-March 2024 to January-March 2025), and semi-annual data for earlier survey rounds.
Since early 2024 more than half of euro area firms considered uncertainty surrounding their five-year inflation expectations to be tilted to the upside (Chart D, panel a). Starting in March 2024, firms were asked whether they considered the risks to the long-term inflation outlook to be balanced or tilted to the upside or downside relative to their baseline expectations. In the most recent survey for the first quarter of 2025, 30% of firms perceived the risks to their inflation outlook over the next five years as broadly balanced, while over half identified upside risks and around 14% saw the risks tilted to the downside.
The level of uncertainty about a firm’s long-term inflation outlook is mainly influenced by the country where it operates (Chart D, panel b). The factors influencing inflation expectations likely also explain the degree of variance firms attach to their expectations.[6] By using a similar approach as that outlined above, we identify the share of variation in uncertainty attributable to the various factors. Country-specific features account for most of the overall variation, followed by firm characteristics. This finding highlights, once again, the importance of where a business is located in shaping its long-term inflation expectations.
Chart D
Uncertainty surrounding the five-year ahead inflation expectations and factors accounting for its variation
a) Firms’ perceived risks | b) Main drivers of uncertainty |
|---|---|
(percentages) | (percentages) |
 |  |
Sources: SAFE and ECB calculations.
Notes: Panel a) shows survey-weighted percentages of firms’ subjective uncertainty regarding the inflation outlook over the next five years. Panel b) shows the Shapley values decomposition of the adjusted R-squared of a regression of uncertainty (a dummy equal to 1 if the firm reports upside risks to its five-year ahead inflation expectations) on the covariates described in the notes to Chart B. Estimations are based on the survey rounds 30-34 (quarterly data from January-March 2024 to January-March 2025).
Overall, understanding what influences the expectations of firms about inflation is crucial for assessing how changes in their business environment might affect the way they form their expectations. Analysis reveals that, in addition to firms' individual characteristics, the countries where they operate play a significant role. This highlights the importance of country-specific common factors that lead firms to adjust their inflation expectations in a similar way.
For more information on the SAFE, see the article entitled “The Survey on the Access to Finance of Enterprises: monetary policy, economic and financing conditions and inflation expectations”, Economic Bulletin, Issue 7, ECB, 2024. Following two pilot rounds, the SAFE became quarterly in March 2024.
These factors are common to several studies. For example, see Bryan, M., Meyer, B. and Parker, N., “The inflation expectations of firms: what do they look like, are they accurate, and do they matter?”, FRB Atlanta Working Paper, No 2014-27, Federal Reserve Bank of Atlanta, 2015.
These characteristics may include shared historical inflation experiences, fiscal policy environments, and cultural and behavioural norms – all factors that influence how firms within the same country respond similarly to potential inflationary pressures and form their inflation expectations.
See Baumann, U., Ferrando, A., Georgarakos, D., Gorodnichenko, Y. and Reinelt, T., “SAFE to update inflation expectations? New survey evidence on euro area firms”, Working Paper Series, No 2949, ECB, Frankfurt am Main, 2024.
Technically, the Shapley-Owen method is used to measure the share of R-squared of the four groups of variables (firm characteristics, sector, country, expectations about business decisions) included in the firm-level regression analysis. The analysis at the survey-round level does not allow to estimate the contribution of euro area HICP.
Similar models are found in Baumann et al., op.cit., and McClure, E. M., Yaremko, V., Coibion, O. and Gorodnichenko, Y., “The Macroeconomic Expectations of U.S. Managers”, Journal of Money, Credit and Banking, forthcoming.