Key Takeaways
- Eurozone inflation is expected to rise to around 3.4% in May, driven by energy prices, while core inflation should move up to 2.3%.
- Goldman Sachs analysts expect that energy inflation will likely increase further to 11.9% year over year from 10.8% in April, although uncertainty remains high.
- With the energy shock working its way through the economy, the European Central Bank is expected to raise interest rates in June.
Eurozone inflation is forecast to increase further this month, according to preliminary consumer price data due on Tuesday, June 2.
At 3.4%, economist estimates compiled by Trading Economics exceed both Eurostat’s final inflation reading of 3% for April and the ECB’s medium-term inflation target of 2%.
Core inflation—which excludes volatile components such as energy and food—is expected to move up to 2.3% from 2.2% in April.
“Inflation is expected to follow its upward path in May, with forecasts pointing to a 40 basis point increase on April’s number. If so, inflation levels will have doubled in just six months from their December 2025 nadir,” says Michael Field, Morningstar’s chief European markets strategist. He adds that this higher level has been driven almost exclusively by the Iran war and the knock-on effect of higher energy prices, as shown by the fact that core inflation has remained steady.
How High Could Inflation Go by Year-End?
“The disproportional increase in oil product prices, emerging signs of disruptions to manufactured good supply chains, and other indirect effects on food and services prices” prompted Goldman Sachs analysts to update their inflation forecast. They expect overall inflation to peak at 3.4% in the fourth quarter of 2026, and they see core inflation “at a weak 2.5% in 2026, rising to 2.7% in the second quarter of 2027, before gradually declining to 2% in the fourth quarter 2028.″ The analysts expect that energy inflation will likely increase further to 11.9% year over year from 10.8% in April, although uncertainty remains high.
Inflation is expected to rise above their April levels in most European countries, which means that Eurozone inflation is likely to remain above 3%, even if it could ease slightly in Germany following the government’s temporary fuel tax relief. Henry Cook, senior Europe economist at MUFG Bank sees inflation at 4% by year-end.
Will Inflation Remain Temporary?
According to May’s European Central Bank survey on the access to finance of enterprises, eurozone firms expect that inflation will increase in the short term, while medium-term expectations remain stable.
“May’s eurozone inflation data will still reflect pressures stemming from the closure of the Strait of Hormuz, but for now the risk of more persistent and widespread inflation appears limited,” says Martina Daga, macro economist at AcomeA Sgr. “The pass-through to gasoline prices occurred rapidly, but with oil prices stabilizing between April and May, the scope for further increases appears limited. For electricity, food, and transportation, however, the adjustment is still underway. The risk that the shock will spread to wages appears limited: Firms report limited pricing power, wage growth was slowing in the first quarter, and the fiscal response from governments has been marginal.”
However, the price shock could be worse than expected as it feeds through supply chains over coming quarters, lifting inflation to 3.0% on average in 2026, above the 2.7% projected by consensus and in the ECB’s latest Survey of Professional Forecasters (SPF), and to 3.2% over the next 12 months, according to Martin Wolburg, senior economist at Generali Investments.
“This outlook broadly matches current inflation compensation, but it still suggests near-term richness,” Wolburg adds. “In May, euro area inflation-linked swaps (ILS) implied 3.9% inflation compensation over one year, while the ECB’s Consumer Expectations Survey showed 4.0% inflation expectations over the next 12 months. Five-year pricing averaged 2.5%, close to consumers’ 2.4% expectation. Market pricing therefore captures the near-term shock but likely overstates the inflation we expect once the initial energy and supply-chain impulse fades.”
Will the ECB Raise Interest Rates in June?
With the energy shock “working its way through the economy and shifting inflation away from ECB target over a significant period of time,” ECB executive board member Isabel Schnabel said in an interview with Reuters that she believes “a rate hike in June will be needed.”
According to Generali’s Wolburg, “recent communication points to a data-dependent stance with greater sensitivity to upside inflation risks.”
“In our view, that keeps policy focused on preventing a temporary shock from feeding into medium-term pricing or wage formation,” Wolburg says. A more inflation-risk-aware ECB “should keep front-end inflation compensation elevated near term while anchoring medium-term expectations.”
Riccardo Marcelli Fabiani, lead economist at Oxford Economics, believes a rate hike in June 11’s meeting is likely. “The scars from the recent experience still hurt, so the ECB will prefer to err on the side of too tight a stance rather than the opposite, to avoid being perceived as acting too late again in a situation that presents too many easy, uncomfortable parallels with 2022.”
Morningstar’s Field sees a rocky path ahead for the European economy and those in charge of steering it. “If inflation continues its steady path upwards, which is very likely given the lack of resolution to the Iran war, then central bankers will be forced to raise interest rates. This will take time to temper inflation and is definitely not the supportive macroeconomic environment we hoped for at the beginning of the year.”
