The Eurozone, in particular, has experienced a significant fall in its inflation from earlier in the year, sinking to 1.9% for May. This drop represents a historic departure from the prevailing political and economic winds. That’s actually mostly driven by a decline in services inflation, which dipped from 4% to 3.2%. The European Central Bank (ECB) is preparing for such an eventuality at its own June meeting. Those numbers have the potential to lead to conversations about changing the direction of monetary policy.
Core inflation, which removes unpredictable items like energy and food, was pegged at 2.3% for the month of May. There is fear that the Eurozone inflation could still not be sufficient to meet the ECB’s target. Recent survey data suggests a somewhat more optimistic forecast for inflation than today’s rate of 3.2%. This implies that although inflation is falling, it is not in line with what the ECB would want to see.
And the unemployment rate in the Eurozone held steady at an all-time record low of 6.2% in April. Combined with the other measures, this figure is indicative of a tight labor market, despite the very steep downward trend of wage growth. The interaction of slowing wage growth and negative inflation trends raises serious concerns about the direction of consumer spending and the broader state of the economy.
The overall direction of inflation is certainly positive, services inflation peaked at 4% before its recent decline. The sharp drop to 3.2% is a reflection of larger economic changes happening throughout the region. What do these changes mean and how will they affect the ECB’s monetary policy decisions in the future?