In May, inflation across the eurozone showed a significant cooling, surprising many and fueling speculation about a possible interest rate cut by the European Central Bank (ECB) at their upcoming meeting.
Annual consumer price growth decreased to 1.9% in May, down from 2.2% in April, according to an early estimate from Eurostat. This marks the first instance of inflation dropping below the ECB’s 2% target since September 2024 and was lower than the anticipated 2% by economists.
This drop in overall inflation reflects the increasing business uncertainty stemming from renewed global trade tensions and weaker consumer demand, which are putting pressure on pricing power in various sectors.
Core inflation—excluding the fluctuating prices of food and energy—also continued its downward trend, slowing to 2.4% in May from 2.7% in April. This figure fell below the 2.5% expectation, with core prices rising just 0.1% monthly.
Food, alcohol, and tobacco remained the leading inflation drivers, rising 3.3% year-on-year, an increase from 3.0% in April. Meanwhile, the services sector, previously robust, saw a marked decline from 4.0% to 3.2%, significantly contributing to the overall slowdown.
Non-energy industrial goods maintained a steady 0.6% annual increase, while energy prices continued to decline, decreasing by 3.6% compared to the previous year.
On a monthly basis, the overall inflation rate held steady after a 0.6% increase in April, indicating a clear slowdown in momentum.
Estonia recorded the highest annual inflation rate at 4.6%, followed closely by Slovakia and Croatia at 4.3% each. In contrast, France experienced the lowest inflation at just 0.6%, highlighting a significant disparity in price pressures within the eurozone.
The highest monthly inflation was seen in Portugal and Croatia, which rose by 0.7% and 0.6% respectively, while several countries, including Belgium, Spain, and France, reported deflationary trends.
Additionally, Eurostat announced a decline in the euro area unemployment rate to 6.2% in May, down from 6.3% in March and 6.4% a year prior.
Market Expectations for ECB Easing
Following the inflation report, the euro weakened against the dollar, falling to $1.1400, as traders began to fully consider a 25-basis-point cut to the ECB’s deposit facility rate this Thursday. Should this cut occur, it would reduce the deposit facility rate to 2.0%, the lowest since January 2023.
Sovereign bonds in the eurozone remained relatively stable, with the yield on Germany’s two-year bond—sensitive to ECB policy shifts—hovering around 1.77%.
European stock markets experienced a slight dip on Tuesday morning; the Euro STOXX 50 fell by 0.8% in response to the OECD’s revision of its global growth forecast, citing a slowdown attributed to increasing trade tensions.
Among individual stocks, Orange, Société Générale, and LVMH saw declines of 3%, 1.9%, and 1.6%, respectively, while Deutsche Telekom emerged as a top performer, gaining 2% among eurozone blue chips.
Photo credit & article inspired by: Euronews
