Eurozone consumer prices rose 1.9% year-on-year in May, according to Eurostat’s Flash estimate, which fell from 2.2% reading in April. In line with expectations. This is the first time since September 2024 that Headline Inflation (HICP) has fallen below the ECB’s 2% target.
Core inflation, which shows prices without volatile components such as energy and food costs, rose 2.3% year-on-year in May, down from 2.7% in April.
“The evacuation process continues in the eurozone, with core inflation falling to 2.3% in May. Today’s data will only strengthen further cases of further interest rate cuts later this week.”
Food, alcohol, tobacco swelling, and service prices have fallen
Food, alcohol and tobacco were higher than the 3% reading in April, seeing the biggest annual increase in May at 3.3% year-on-year, according to Eurostat estimates. Service prices rose 3.2% compared to 4% in April, but during that time, non-energy industry products remained stable at 0.6%. Energy was stable at -3.6% along the previous month.
“Today’s release confirms that the outlook is for continuous divergence,” says Ricardo Marcelifabiani, senior economist at Oxford Economics. “Silent oil prices and stronger euros will reduce energy inflation, leading to cheaper production inputs and imports. Slowing wage growth will bring about the much-anticipated cooling of the sticky service category.
Another report from Oxford Economics shows that wages in the eurozone are moving at a slow pace, with the expected next step being “stripping out of service.”
“We believe this will ease service inflation in the coming months as demand is weaker and price expectations are likely to drop, and the decline in services will drag core inflation to 2% by the end of the year,” according to Marcelli Fabiani.
Each month, in May, both headline inflation and core inflation remained stable.
Will the ECB be cut this week?
The European Central Bank’s next monetary policy conference will be held in Frankfurt on June 5th, and the market expects a mitigation cycle to continue amid economic headwinds. The ECB cut key interest rates by 25 basis points on April 17 to 2.25%6 consecutive decreases in this cycle.
The ECB policy rate has already reached the upper limit of neutral corridors from 1.75% to 2.25% calculated by ECB staff. However, Martin Wolburg, a senior economist at Generali Investments, has yet to see the end of the cutting cycle. “We are looking for an additional 25 bps cut on June 5th. We continue to expect the final cut to be 1.75%, but Madame Lagarde should emphasize the data dependency and intentionally leave the timing of the final cut open,” he says.
According to Marcelli Fabiani of Oxford Economics, “The ECB reduction rate this Thursday seems like a simple bet, especially given the clear disinflation outlook for services, and should continue to be more easing in the second half of the year.”
Felix Feather, an economist at Aberdeen Investments, also believes Thursday’s cuts “maybe not the end of the cycle. Policymakers will need to provide further support to the economy once the impact of US tariff changes is fully felt.”
“Even though the EU is responding to the US with more stringent tariffs, cheaper oil, stronger euros and a much tighter labor market will help calm inflation in the short term,” he adds. “We therefore expect separate fees to be reduced by September, and fees to be reduced to clearly regulated areas.”
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