Inflation in the Eurozone climbed to 3.2% in May from 3% in April, driven by price increases in countries like Bulgaria, Lithuania, and Greece, where the index exceeds 5%, making it easier for the European Central Bank (ECB) to decide to raise interest rates at its next monetary policy meeting scheduled for June 11.
The European Consumer Price Index (CPI) has now increased for four consecutive months and has risen by 1.5 points during this period, reaching its highest level since September 2023, when the continent was beginning to recover from the inflationary wave triggered by the invasion of Ukraine a year earlier.
Energy is the component with the highest rate in May (10.9% compared to the same month last year, only a tenth higher than in April), followed by services (3.5%, half a percentage point higher than in April), food, alcohol, and tobacco (2%), and non-energy industrial goods (0.9%), as detailed by Eurostat on Tuesday. Services showed the biggest jump in inflation, which could indicate the price increase typical of Easter or an initial sign of the impact of rising energy costs.
"The additional increase in overall inflation and, in particular, in services in May reinforces the need for the ECB to raise interest rates and suggests that the upside risks to underlying inflation could be greater than we anticipated. Eurozone general inflation - which had already risen from 1.9% in February to 3.0% in April - increased to 3.2% in May. Although it aligns with the consensus forecast, it was slightly higher than expected since we learned last week that inflation had fallen in Germany (...) Energy inflation is likely to decrease for the rest of this year, even if crude oil and natural gas prices do not fall. However, food inflation is likely to rebound, and underlying inflation could also trend upwards in the coming months. We have only forecasted two 25 basis points rate hikes by the ECB this year, but the risks to this forecast seem to be skewed to the upside," evaluated the British consultancy Capital Economics on Tuesday.
Carsten Brzeski, Global Head of Macroeconomics at ING, agrees that this data "strengthens the case" for the ECB to raise rates next week. "With the Middle East war entering its fourth month, the energy price shock has become more permanent, although oil prices are actually lower than many had imagined for a more adverse scenario regarding the duration of the war. Therefore, there will also be no automatic change in inflation and growth scenarios at the ECB meeting next week. However, for inflation in the eurozone, the only way is currently up. It will not be a sharp increase, but a moderate and gradual one. Although the side effects of higher energy prices on other prices, such as transportation and food, will be difficult to avoid, the latest inflation expectations based on surveys have decreased slightly. Price expectations in both industry and services, as well as the ECB's own long-term consumer inflation expectations, fell slightly in May (...) Enough to support our view of only a gradual and limited increase in inflation in the coming months."
The reason experts are cautious about the expected evolution of inflation in the coming months is mainly the absence of substantial fiscal support, as there was four years ago, and the fact that household savings ratios are much lower than they were then, which could limit consumption capacity and curb the inflationary spiral.
Another differentiating factor is that Eurozone inflation had already exceeded 4% year-on-year when the energy price shock hit in 2022, and the ECB did not react by raising interest rates until July of that year when inflation had already surpassed 8% year-on-year. "At that time, less than 25% of the main inflation components had an inflation rate below 1% year-on-year. In April of this year, it was 50%," recalls the ING expert.
All this does not mean that the ECB will not raise rates next week, he admits, but it does imply that "aggressive hikes" are not necessary as they were back then. "Even if the Middle East war were to end tomorrow, the damage to inflation is already done. Inflation has started - and will continue to - affect the eurozone economy. The only question is whether it will fall into the 'transitory' category or if supply chain disruptions could create more chain effects than 'just' in transportation and food prices. Given the experience of 2022, it is likely that the ECB will opt for a rate hike. It won't have much impact on inflation expectations, but it would be a symbolic move, underscoring the ECB's determination to act."