Key Takeaways
- Eurozone flash inflation accelerated to 3.2% in May, matching economists’ expectations and exceeding April’s figure.
- The Iran war is proving to be a longer-term inflation driver, with higher energy costs filtering through to other product categories.
- Rising core inflation and rising price pressures across much of the euro area have reinforced expectations that the ECB will raise interest rates next week.
Consumer prices in the euro area rose 3.2% in May according to preliminary data released by Eurostat, matching consensus expectations and marking an acceleration from 3.0% in April. Inflation remains above the European Central Bank’s target inflation rate of 2%.
Price increases were primarily driven by energy prices, up 10.9% compared to a year earlier as the ongoing blockade of the Strait of Hormuz chokes global hydrocarbon supplies.
“Good news on inflation, but the markets, and likely the ECB won’t be getting carried away,” says Michael Field, chief European markets strategist at Morningstar. “3% is still far away from the targeted rate, and unless the conflict ends tomorrow then that figure is likely to continue rising.”
Core inflation, which strips out energy prices and other volatile components such as food, came in at 2.5%, slightly higher than the 2.4% consensus estimate compiled by Trading Economics. That’s “also something of a concern, indicating that price rises have spread much further than just energy costs,” according to Field.
Will the ECB Raise Interest Rates This Month?
Both overall inflation and core inflation were higher than in April, strengthening an already-high likelihood of an ECB rate hike on June 11.
“Before today there was a 92% probability of a 25 basis point rise in interest rates at the next ECB meeting,” Field says. “An interest rate rise is pretty much a given at this stage.”
After Tuesday’s inflation figures were released, derivatives data compiled by Bloomberg implied a roughly 97% likelihood of an ECB rate hike by 0.25 percentage points at its next meeting.
“A week ahead of the next ECB meeting, this is the expected uptick in inflation that will motivate the central bank to decide on an ‘insurance’ hike,” ING economist Carsten Brzeski says.
Euro-Area Periphery Suffers Worse Energy Price Shock Than Large Western Economies
Year-over-year inflation was highest among Eastern and Southern European members of the eurozone.
Bulgaria marked the bloc’s highest rate in May at 6.3% with Greece, Lithuania and Croatia also recording rates around the 5% mark. German inflation cooled to 2.7% from 2.9% a month earlier, while France’s rate edged up to 2.8% from 2.5%.
Italy, the eurozone’s third-largest economy, marked a notable increase in year-over-year inflation, from 2.8% in April to an estimated 3.3% in May.
“With the war in the Middle East entering its fourth month, the energy price shock has become more permanent—even though oil prices are actually lower than what many had pencilled in for a more adverse scenario regarding the length of the war,” according to Brzeski. “This is also why there won’t be any automatic shift in inflation and growth scenarios at the ECB’s meeting next week.”
James Gard contributed to this story.
