Eurozone inflation accelerated in May, boosting expectations that the European Central Bank will raise interest rates at next week’s meeting. The headline CPI rose from 3.0% y/y to 3.2% y/y, in line with market expectations, while the core CPI, which excludes energy, food, alcohol and tobacco, accelerated from 2.2% y/y to 2.5% y/y, beating expectations of 2.4% y/y. The stronger fundamental reading is likely to be of particular interest to policymakers given growing concerns that inflation pressures are expanding beyond capacity.
The composition of the report highlights those concerns. Energy price inflation remained the largest contributor, rising slightly from 10.8% y/y to 10.9% y/y. More importantly, services inflation accelerated sharply from 3.0% y/y to 3.5% y/y, indicating that higher costs are increasingly spreading into the domestic economy. By contrast, food, alcohol and tobacco inflation slowed from 2.4% y/y to 2.0% y/y, helping to offset some upward pressure from energy and services.
The data supports increasingly hawkish rhetoric from European Central Bank officials in recent weeks. Policymakers, including Isabel Schnabel, have argued that the central bank can no longer simply consider the inflationary effects of rising energy prices if they begin to feed into broader price-setting behavior. With headline and core inflation rising, the latest figures strengthen the case for a June rate hike and may keep markets alert to the possibility of further tightening if core price pressures remain.
| index | April | maybe | Market forecast |
|---|---|---|---|
| Headline of the Consumer Price Index (CPI) on an annual basis | 3.0% | 3.2% | 3.2% |
| Core CPI on an annual basis | 2.2% | 2.5% | 2.4% |
| Energy inflation on an annual basis | 10.8% | 10.9% | |
| Inflation in services on an annual basis | 3.0% | 3.5% | |
| Food, alcohol and tobacco on an annual basis | 2.4% | 2.0% | |
| Non-energy industrial goods on an annual basis | 0.8% | 0.9% |
