Eurozone inflation fell below the European Central Bank's (ECB) 2% target in May, registering a lower-than-expected 1.9% due to a sharp decline in the services sector, according to preliminary data from the Eurostat statistics agency on Tuesday.
Economists interviewed by Reuters had expected the May reading to remain at 2%, compared with 2.2% in the previous month. Inflation in the services sector, which has been a major concern, slowed sharply to 3.2% from 4% previously. Meanwhile, core inflation, which excludes energy, food, tobacco and alcohol prices, also eased to 2.3% in May from 2.7% in April.
"This confirms that last month's surge in services inflation was only a temporary effect related to the Easter holiday, and that the downward trend remains strong," said Jack Allen-Reynolds, deputy chief economist for the Eurozone at Capital Economics.
The latest data will be an important consideration for the ECB ahead of its interest rate decision this week. In April, the ECB cut its deposit rate to 2.25%, almost half of its peak of 4% in mid-2023. Markets are currently pricing in a 95% chance of a further 25 basis point cut on Thursday. While the May data is unlikely to have much of an impact on the outcome this week, Allen-Reynolds said it strengthens the case for another rate cut at the July meeting.
However, the global economic outlook remains uncertain. US President Donald Trump’s tariff policies, including retaliatory tariffs on the EU, are adding to the pressure on global growth, although the direct impact on inflation is still unclear. The latest OECD economic outlook expects the eurozone economy to grow by 1% in 2025, while inflation is forecast at 2.2%, in line with the March report.
Eurozone bond yields fell after the inflation data: Germany’s 10-year bond yield fell more than two basis points to 2.499%, while France’s 10-year yield fell more than one basis point to 3.169%. The euro, on the other hand, recorded a decline of around 0.3% against the US dollar.
