Joachim Nagel, the president of Germany's central bank, said inflation is at risk of staying above target despite the ceasefire between the U.S. and Iran.
Speaking to CNBC, Nagel said the "energy price shock" is "still in the system." He went on to say that the European Central Bank's decision to raise its key interest rate for the first time in three years was correct.
"Now we have to wait, the situation is still very opaque," he claimed. "Is it stable or not in the Middle East? We do not know. There are peace talks, there are 50 days more or less left, then we will see how reliable this whole situation is."
When raising the interest rate, the body also increased its inflation forecast. It now expects it to average 3% this year before dropping to 2.3% in 2027 and 2% the year after. The outlook has changed as a result of an expectation of higher energy prices.
At the same time, the body reduced its economic growth forecast, now expecting a 0.8% expansion for the year, 1.2% for 2027 and 1.5% for 2028.
The euro zone's annual inflation rate rose to 3.2% in May, marking another increase in consumer prices in the block.
Inter-annual inflation accelerated from 3% in April, leaving price growth well above the European Central Bank's 2% target. Energy remained the biggest contributor to inflation, with prices rising 10.9% year over year in May, according to preliminary data released by Eurostat and reported by CNBC.
European economies continue to grapple with higher oil and natural gas prices as a result of the war in Iran, which disrupted energy markets and increased concerns about supply stability. Europe remains particularly vulnerable to energy price shocks because it imports a large share of its energy needs.
Services inflation also accelerated during the month, rising to 3.5% from 3% in April, according to the data. Meanwhile, inflation for food, alcohol and tobacco eased to 2% from 2.4% a month earlier.
Additional data showed underlying price pressures also strengthened. Core inflation, which excludes volatile food and energy prices, rose to 2.5% from 2.2% in April, according to Reuters.
Inflation trends differed considerably across the euro area's member countries. Germany, the bloc's largest economy, recorded an annual inflation rate of 2.7% in May, down from 2.9% in April. France's inflation rate increased to 2.8% from 2.5%, while Greece and Lithuania both recorded annual inflation rates above 5%.
