Consumer prices in the eurozone increased by 1.9% year over year in May, according to Eurostat’s flash estimate, down from April’s reading of 2.2%, and in line with expectations. This is the first time since September 2024 that headline inflation has fallen below the ECB’s target of 2%- economists still expect a further rate cut on Thursday.
Core inflation, which shows prices without volatile components such as energy and food costs, rose 2.3% year over year in May, down from 2.7% in April.
“The disinflation process continues to play out in the eurozone, with core inflation falling to 2.3% in May. Today’s data only strengthens the case for a further rate cut later this week,” says Grant Slade, international economist at Morningstar.
Food, Alcohol and Tobacco Inflation Up, Service Prices Slowed Down
According to Eurostat’s estimates, food, alcohol and tobacco saw the highest annual rise in May at 3.3% year over year, higher than April’s reading of 3%. Services prices increased by 3.2%, compared with 4% in April, meanwhile non-energy industrial goods remained stable at 0.6%. Energy was also stable at -3.6%, in line with the previous month.
“Today’s release confirms that the outlook is for continued disinflation,” says Riccardo Marcelli Fabiani, senior economist at Oxford Economics. “Subdued oil prices and a stronger euro will drag down energy inflation and lead to cheaper production inputs and imports. Decelerating wage growth will bring the long-awaited cooling in the sticky services category. Only strong increases in unprocessed food represent an upside risk.”
According to another report of Oxford Economics, wages in the eurozone are advancing at a slower pace, and the next step to expect is “service disinflation”.
“Together with weak demand and given price expectations are likely to fall, we think this will lead to services inflation easing over the next months. The fall in services will drag core inflation closer to 2% by year-end,” according to Marcelli Fabiani.
On a monthly basis, both headline inflation and core inflation were stable in May.
Will the ECB Cut Rates This Week?
The European Central Bank’s next monetary policy meeting will take place in Frankfurt on June 5, and markets expect that the easing cycle will continue amid economic headwinds. The ECB cut its key interest rate by 25 basis points to 2.25% on April 17, the sixth consecutive reduction in this cycle.
The ECB’s policy rate has already reached the upper bound of the neutral corridor of 1.75% to 2.25% calculated by ECB staff. However, Martin Wolburg, senior economist at Generali Investments, does not see an end of the cutting cycle yet. “We look for another 25 bps cut on June 5. While we continue to expect a final cut to 1.75%, Mrs. Lagarde should emphasize data-dependency and leave the timing of the final cut deliberately open,” he says.
According to Marcelli Fabiani of Oxford Economics, “given the clear disinflationary outlook, especially for services, the ECB cutting rates this Thursday seems an easy bet, and more easing should follow later in the year.”
Also Felix Feather, economist at Aberdeen Investments, thinks that Thursday’s cut “will probably not be the last in the cycle, as policymakers will most likely need to provide further support to the economy once the effects of the US tariff changes have been fully felt.”
“Cheaper oil, a stronger euro, and a less tight labor market will help keep inflation subdued in the short term, even if the EU responds to the US with tougher tariffs,” he adds. “We therefore expect another rate cut by September, bringing rates into decidedly accommodative territory.”
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