Euro zone inflation rises as ECB prepares to cut rates

The euro zone’s annual rate of inflation rose faster than expected in May, official data showed today, but the European Central Bank is still seen cutting interest rates next week.

Consumer prices in the single currency area rose 2.6% in May from a year earlier, up from April’s 2.4% rate, the EU’s statistics agency said.

The figure is above the ECB’s 2% target.

ECB officials will be disappointed by the data for core inflation, which strips out volatile energy, food, alcohol and tobacco prices and is a key indicator for the bank.

The data showed its rate ticked up to 2.9% in May from 2.7% in April.

Analysts surveyed by FactSet and Bloomberg had forecast that consumer prices would rise to 2.5% and predicted that core inflation would be stable.

The figures are, however, unlikely to stop the ECB from lowering rates on June 6, analysts said.

The ECB aggressively hiked rates starting in July 2022 to tame soaring inflation but has held borrowing costs steady in the past few months amid growing pressure for a rate cut.

“The temporary rise in inflation will not prevent the clearly-communicated June interest rate cut,” said Riccardo Marcelli Fabiani, senior economist at Oxford Economics.

“But the European Central Bank will be cautious and is unlikely to lower interest rates at the July meeting, given the momentary interruption of disinflation, especially in services, and the strong wage data,” he added.

Services recorded the biggest price rise in May at 4.1%, up from 3.7% the previous month.

After declining for several months, energy prices rose again by 0.3% in April after recording a 0.6% drop in April.

Food, alcohol and tobacco price increases slowed to 2.6% in May from 2.8% the previous month.

Across the euro zone, Latvia recorded the lowest inflation rate in May, at 0.2%, Eurostat data showed. Finland came second, registering an inflation rate of 0.5% in May. Belgium was the highest at 4.9%.

The annual rate of inflation in Ireland increased to 1.9% in May, up from 1.6% in April, a flash estimate of the Harmonised Index of Consumer Prices (HICP) from the Central Statistics Office showed yesterday.