Inflation in the Eurozone eased more than expected in May, with the underlying price growth also dropping. This suggests that the European Central Bank should be wary when considering further rate hikes, as the fastest ever monetary tightening cycle begins to take effect.
The inflation rate in the 20 nations sharing the euro fell to 6.1 per cent, down from 7.0 per cent in April, falling below economists’ predictions of 6.3 per cent. National data from earlier in the week had already forecast this drop. Core inflation, which excludes volatile food and fuel prices, decreased to 5.3 per cent from 5.6 per cent, much lower than the expected 5.5 per cent.
In Ireland, headline inflation went down to 5.4 per cent due to declining energy prices, while core inflation unexpectedly rose to 5.7 per cent, putting pressure on households. To combat rising prices, the ECB has raised base rates by 3.75 percentage points to 3.25 per cent over the past year. Although underlying price pressures have been building throughout 2023, the ECB has committed to another quarter-point rate hike on June 15th.
The current figures appear to suggest caution, however, Europe’s inflation problem is far from solved. The services inflation rate slowed to 5.0 per cent from 5.2 per cent, while industrial goods inflation decreased to 5.8 per cent from 6.2 per cent. Meanwhile, food inflation dropped to 12.5 per cent from 13.5 per cent.
ECB vice-president Luis de Guindos mentioned that the bank has nearly completed its monetary policy tightening to bring inflation back to its target of 2 per cent, but the cycle isn’t quite over yet. Euro-zone wage growth is currently between 5 and 6 per cent, twice the rate that would be consistent with the ECB’s inflation target. The ECB is hoping that inflation will slow and wage growth will follow, thus mutually cancelling each other out.
It is also possible that economic growth is not as resilient as initially thought, particularly in the manufacturing sector, which could affect the overall economy. Financial investors have predicted two more rate hikes from the ECB, with one move fully priced in by June and a second in either July or September.
