Inflation in the eurozone increased to 2.6% in May, as reported by Eurostat on Friday. Despite this higher-than-expected figure, market expectations for an interest rate cut from the European Central Bank (ECB) next week remain unchanged.
Economists surveyed by Reuters had predicted a slight rise to 2.5% from April’s 2.4%. Additionally, core inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, rose to 2.9% from 2.7% in April, surpassing forecasts of a stable reading.
This data arrives as the ECB is widely anticipated to announce an interest rate cut at its June 6 meeting, the first reduction since 2019. The ECB, which governs monetary policy for the 20-member euro area, began its latest rate-hiking cycle in July 2022, lifting rates from negative territory to the current 4%.
A departure from the expected 25 basis point cut at the upcoming meeting would surprise markets, given the consistent indications from ECB policymakers. Despite the uptick in inflation, money markets continue to fully price in a June rate cut, with expectations for just one additional reduction in 2024.
The headline inflation figure has notably decreased from a peak of 10.6% in October 2022, staying below 3% for the past eight months. However, fluctuations in the inflation rate are anticipated in the coming months due to base effects from the energy market and the rollback of government fiscal support schemes across the bloc.
ECB members are likely to pay close attention to the services inflation rate, a critical measure of domestic inflationary pressures, which increased to 4.1% from 3.7%. The central bank staff will also release updated inflation and growth projections at next week’s meeting, providing further insights into the potential pace and extent of rate cuts this year.
