Eurozone headline and core inflation surged in May, primarily due to increased service costs, just before the European Central Bank’s (ECB) governing council meeting next week, where a rate cut is highly anticipated.
The Harmonized Index of Consumer Prices (HICP) reported a higher-than-expected rise of 2.6% in May, following a 2.4% increase in April, according to preliminary data from Eurostat. Annual inflation stood at 2.5%, deviating from the ECB's 2% target.
Core inflation, excluding energy, food, alcohol, and tobacco, unexpectedly accelerated to 2.9%, contrary to the forecast of a stable 2.7%.
Specifically, the services cost component of the HICP saw faster growth, reaching 4.1% compared to 3.7% in April. This spike is attributed to the base effect triggered by Germany’s introduction of subsidized rail travel last May.
Concurrently, the increase in food, alcohol, and tobacco prices eased to 2.6% from 2.8%. Energy prices, however, reversed a 0.6% decline to gain 0.3%. The annual growth in prices for non-energy industrial goods slightly decelerated to 0.8% from 0.9%.
On a monthly basis, the HICP rose by 0.2% in May, with final data expected on June 18.
Jack Allen-Reynolds, an economist at Capital Economics, suggested that the increases in both headline and core inflation are unlikely to deter the ECB from cutting interest rates next week. However, he noted that an additional rate reduction in July now appears improbable.
Bert Colijn, an economist at ING, commented that while the ECB is poised to lower rates in June, there will be an intense debate on how much further the bank can ease economic restraints over the remaining year.
Among the major Eurozone economies, inflation accelerated in all but Italy in May. Germany saw harmonized inflation rise to 2.8% from 2.4% in April, Spain’s inflation climbed to 3.8% from 3.4%, and France's inflation increased to 2.7% from 2.4%. In contrast, Italy's inflation eased slightly to 0.8% from 0.9% in April.
