Eurozone inflation, according to an estimate, picked up to about 3.2% in May, largely because energy prices jumped up again; in fact, they rose at double-digit levels. This kind of official “flash” read seems to match pretty tightly what economists said in a recent Reuters survey, and most people are betting it will nudge the central bank toward that long-awaited interest rate hike.
Energy was the key trigger here, with costs up 10.9% in May. That’s a small step faster than the 10.8% growth in energy prices seen in the prior month, so yeah, not a huge leap but enough.
Services inflation didn’t stay flat either. It edged higher, moving from 3% in April to 3.5% now. On the other hand, the bill for food, alcohol, and tobacco was a bit gentler, slipping to 2% from 2.4% in April.
The picture wasn’t uniform across places. Germany, which is the Eurozone’s biggest economy, actually saw its yearly inflation rate cool to 2.7% from 2.9%. Meanwhile, France moved the other way, climbing to 2.8%. Greece and Lithuania both showed inflation numbers pushing past 5%, based on Eurostat figures.
Energy Shocks and the ECB’s Imminent Rate Hike
The May data sorta confirms that inflation across the bloc is staying stubbornly above the 2% target that the European Central Bank set. Before the U.S.-Iran war broke out, regional inflation had managed to dip under that key number, at least for a bit.
Since Europe is a big net energy importer, it is pretty vulnerable to supply shocks. Oil and gas prices have stayed high through the fighting, and that has helped push the headline inflation rate up, from 2.6% in March to 3% in April, and then to 3.2% in May
Markets are waiting for a clear-cut monetary policy reaction. Based on market info from LSEG, traders are now pricing in a 94% chance that the central bank will lift its key interest rate by 25 basis points at the next meeting that is coming..
After the inflation release, the euro basically held flat versus the dollar near $1.164. At the same time, the yield on Germany’s 10-year bund, which is a core reference for Eurozone borrowing costs, slipped by 6 basis points.
Carsten Brzeski, global head of macro at ING, said that this forecasted inflation uptick basically opens the door for an “insurance” rate hike next week. He also warned that the energy shock linked to the Iran conflict is becoming more and more entrenched, and not just a temporary ripple.
While oil prices stay below the worst-case forecast, Brzeski said the ripple effects are hard to dodge, especially for transportation and food. Even with a bit of cooling in the survey-based inflation expectations, he still stressed that the current path for Eurozone inflation is, at least for now, a moderate and steady rise.
