Inflation in the euro area cooled more than expected in May, bolstering expectations that the European Central Bank (ECB) will announce another interest rate cut at its meeting on Thursday.
Annual consumer price growth slowed to 1.9% in May, down from 2.2% in April, according to a flash estimate from Eurostat. The figure came in below economists' forecast of 2%, and marks the first time inflation has dipped below the ECB's 2% target since September 2024.
The decline in headline inflation suggests that business uncertainty, partly driven by renewed global trade tensions and soft consumer demand, is weighing on pricing power across sectors.
Core inflation, which strips out volatile food and energy prices, also showed signs of easing. It slowed to 2.4% in May, from 2.7% in April, falling below expectations of 2.5%. On a monthly basis, core prices rose by just 0.1%.
Among the main inflation components, food, alcohol and tobacco remained the strongest driver, rising 3.3% year-on-year, up from 3.0% in April. Services inflation, which had been particularly resilient, dropped sharply from 4.0% to 3.2%, contributing significantly to the broader deceleration.
Non-energy industrial goods recorded a stable 0.6% annual increase, while energy prices continued their downward trajectory, declining by 3.6% compared to a year ago.
On a monthly basis, overall inflation was flat, after a 0.6% rise in April, signalling a clear slowdown in momentum.
The highest annual rates were recorded in Estonia (4.6%), Slovakia and Croatia (both 4.3%). France registered the lowest inflation, at just 0.6%, suggesting a stark divergence in price pressures among euro area members.
Monthly inflation was highest in Portugal and Croatia, where prices rose 0.7% and 0.6%, respectively. By contrast, deflationary readings were observed in Belgium, Spain, France, Lithuania, the Netherlands, Austria and Slovenia.
In a separate release, Eurostat reported that the euro area unemployment rate fell to 6.2% in May, down from 6.3% in March and 6.4% a year earlier.
Market bets on ECB easing
The euro lost ground against the dollar following the inflation print, dropping to $1.1400 as investors moved to fully price in a 25-basis-point cut to the ECB’s deposit facility rate on Thursday. The cut would bring the deposit facility rate to 2.0%, its lowest level since January 2023.
Eurozone sovereign bonds remained broadly. The yield on Germany’s two-year bond, which is sensitive to ECB policy moves, traded at 1.77%.
European equities edged lower on Tuesday morning, with the Euro STOXX 50 down 0.8%, after the OECD cut its global growth outlook, pointing to a slowdown fuelled by rising trade tensions.
Orange, Société Générale and LVMH led losses, falling 3%, 1.9% and 1.6%, respectively. Deutsche Telekom gained 2%, emerging as the top performer among eurozone blue-chip stocks.
