Monthly inflation data released on Thursday showed that for the first time in several months euro zone inflation has fallen below the ECB’s target. In May, it hit a surprising bottom of 1.9%. This overall decline is the result of a historic collapse in services prices, according to data from Eurostat, the European Union’s statistics agency. The ECB has a target inflation rate of 2 percent. Despite the recent uptick in prices, this new data could usher in one more interest rate cut at the Federal Reserve’s increasingly likely July meeting.
The April inflation figures are not an isolated exception, but instead continue a trend of softening price pressures throughout the euro area. And core inflation just fell from 2.7% in April to 2.3% in May. This measure excludes the volatile categories of energy and food from this calculation. This decline underscores the current economic uncertainties facing the euro zone, particularly amid external pressures such as U.S. President Donald Trump’s protectionist tariff plans.
We can hear the excitement in markets! As things stand, they are currently pricing in a 95% probability that the ECB will deliver a 25bp cut to interest rates this Thursday. The central bank’s deposit facility rate is currently at 2.25%, a far cry from its peak of 4% hit in mid-2023. The easing of inflation is vital for monetary policy makers as they navigate a challenging economic environment marked by geopolitical tensions.
This resulted in services inflation falling by the largest amount since the fall of 2020, and its lowest level since August 2019. This welcomed dip suggests that last month’s surge was indeed an aberration due to Easter holiday spending. Some analysts see this downward trend in service prices as a sign of broader deflationary forces at work.
“But May’s inflation data strengthen the case for another cut at the following meeting in July,” – Jack Allen-Reynolds.
Euro zone economy still bears the scar of uncertainty. Factors such as Trump’s proposed “reciprocal” tariffs could have significant implications for trade within the European Union and may further complicate the ECB’s decision-making process.
Inflation is continuing to march towards the ECB´s target of 2%. Looking toward the remainder of the year, the Blue Chip consensus forecast sees 2023 inflation averaging out at 2.2%. Moving ahead, the future is anything but clear as outside forces still threaten to darken the region’s economic horizon.
“May’s steep decline in services inflation, to its lowest level in more than three years, confirms that the previous month’s jump was just an Easter-related blip and that the downward trend in services inflation remains on track,” – Jack Allen-Reynolds.