EURO zone inflation rose to an estimated 3.2 per cent in May, driven by double-digit energy price growth, official data showed yesterday, reports CNBC.
The print, which was in line with forecasts in a Reuters poll of economists, is expected to lock in expectations of an interest rate hike at next week’s European Central Bank meeting.
Energy costs represented the highest annual rate of inflation in May, according to the flash data, with prices rising by 10.9pc – a slight rise from the euro zone’s 10.8pc energy price growth recorded the previous month.
Services inflation rose to 3.5pc from 3pc in April, while food, alcohol and tobacco prices cooled to 2pc from 2.4pc the previous month.
Inflation rates also varied drastically between individual markets. Germany, Europe’s biggest economy, saw annual inflation fall to 2.7pc in May from 2.9pc in April. But Greece and Lithuania’s annual inflation rates rose above 5pc last month.
In France, annual inflation rose from 2.5pc in April to 2.8pc in May.
Yesterday’s print showed inflation in Europe is continuing to rise above the European Central Bank’s 2pc target as oil and gas prices remain elevated in the wake of the US-Iran war.
Inflation in the euro zone jumped to 3pc in April, up from 2.6pc in March. Prior to the outbreak of the conflict in Iran, inflation in the euro area had dipped below the 2pc threshold.
Europe is particularly vulnerable to energy shocks as a major net energy importer.
Markets are currently pricing in a 94pc chance of the ECB hiking its key interest rate by 25 basis points at its meeting later this month, according to LSEG data.
Following the data release, the euro was flat against the dollar at around $1.164. The yield on Germany’s 10-year bund, broadly seen as a benchmark for the euro zone, fell by 6 basis points.
Carsten Brzeski, global head of macro at ING, said in a note on Tuesday morning that the May inflation data paves the way for an ECB rate hike next week.
“A week ahead of the next ECB meeting, this is the expected uptick in inflation that will motivate the central bank to decide on an ‘insurance’ hike,” he said.
Brzeski added that the Iran war-induced energy shock had “become more permanent,” but noted that oil prices remain lower than levels forecast by many market watchers under a more adverse scenario regarding the length of the war.
“Nevertheless, for inflation in the euro zone, the only way is currently up,” he said. “Not a sharp up but a rather moderate and gradual lift. While knock-on effects from higher energy prices on other prices, like transportation and food, will be hard to avoid, the latest survey-based inflation expectations have come down a bit.”
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