Euro Area Inflation Rises to 2.6%, Core CPI Jumps to 2.9%

Euro Area Inflation Overview

Inflation in the euro area rose to 2.6% in May 2024, according to a flash estimate from Eurostat released on Friday. This increase comes after a 2.4% rate in April, slightly above economists’ forecasts of a 0.1 percentage point rise. This upward trend highlights ongoing inflationary pressures in the region.

Main Components of Inflation

Services: Services are expected to see the highest annual rate of 4.1% in May, up from 3.7% in April. This sector continues to drive overall inflation significantly.

Food, Alcohol & Tobacco: This category is anticipated to register a 2.6% inflation rate, a minor decline from 2.8% in April, reflecting slight price adjustments.

Non-Energy Industrial Goods: These goods are forecasted to have an inflation rate of 0.8% in May, down from 0.9% in April, indicating stable but low inflation in this sector.

Energy: Energy prices are projected to see a modest increase to 0.3% in May, recovering from a negative rate of -0.6% in April, suggesting a turnaround in energy cost trends.

Core Inflation Insights

Core inflation, which excludes the volatile effects of energy, food, alcohol, and tobacco, rose to 2.9% in May from 2.7% in April. This was higher than the Reuters poll projection of a flat reading at 2.7%. The increase in core CPI indicates underlying inflationary pressures beyond the more volatile sectors.

Economic Context and ECB Expectations

The data comes as the European Central Bank (ECB) is widely expected to cut interest rates at its June 6 meeting, marking the first reduction since 2019. The ECB began its latest hiking cycle in July 2022, raising rates from negative territory to the current 4%. Any deviation from the anticipated 25 basis point cut would be a significant market shock, given the strong signals from policymakers in recent weeks.

Market Forecast

Given the increase in both headline and core inflation rates, a bearish outlook for the euro area is anticipated. Persistent inflationary pressures, particularly in services and core components, may lead to tighter monetary policies and reduced consumer spending power, potentially slowing down economic growth in the short term. Traders should remain cautious, monitoring further inflation data and central bank responses.

While headline inflation increased, fluctuations in the rate are forecast over the coming months due to base effects from the energy market and the unwinding of government fiscal support schemes across the bloc. Despite the recent rise, the headline figure has cooled significantly from a peak of 10.6% in October 2022, remaining below 3% for the past eight months.