Eurozone Inflation Dips Below ECB Target, Sparking Rate Cut Expectations

Eurozone inflation dropped more than anticipated in May, fueling expectations that the European Central Bank (ECB) will likely announce another interest rate cut during its upcoming Thursday meeting, Euronews reported.

According to a preliminary Eurostat estimate, the annual consumer price inflation eased to 1.9% in May from 2.2% in April. This figure fell short of economists’ predictions of 2% and marked the first time since September 2024 that inflation dipped below the ECB’s 2% target.

The decrease in headline inflation points to growing uncertainty among businesses, influenced by renewed global trade tensions and soft consumer demand, which is limiting price increases across various sectors.

Core inflation, which excludes volatile food and energy prices, also softened, slipping to 2.4% in May from 2.7% in April and falling short of the expected 2.5%. On a monthly basis, core prices inched up by only 0.1%.

Food, alcohol, and tobacco continued to be the primary contributors to inflation, climbing 3.3% year-on-year compared to 3% in April. Services inflation, which had remained stubbornly high, saw a notable drop from 4.0% to 3.2%, playing a significant role in the overall slowdown.

Non-energy industrial goods showed steady growth with a 0.6% annual rise, while energy prices continued to decline, falling 3.6% compared to a year ago.

Monthly headline inflation remained flat in May after a 0.6% increase in April, signaling a clear loss of momentum in price rises.

Among euro area countries, Estonia recorded the highest annual inflation rate at 4.6%, followed by Slovakia and Croatia at 4.3%. France posted the lowest inflation rate, just 0.6%, highlighting a wide disparity in inflationary pressures across member states.

On the monthly scale, Portugal and Croatia experienced the steepest price increases, at 0.7% and 0.6% respectively. Meanwhile, several countries, including Belgium, Spain, France, Lithuania, the Netherlands, Austria, and Slovenia, saw prices decline.

In a related update, Eurostat reported that the eurozone unemployment rate fell to 6.2% in May, down from 6.3% in March and 6.4% a year prior.

Following the inflation figures, the euro weakened against the US dollar, dropping to .1400 as investors priced in the ECB’s anticipated 25 basis point reduction in its deposit facility rate. This cut would bring the rate down to 2%, its lowest since January 2023.