Euro-zone inflation slows below 2%, backing more ECB cuts

Irish Times

2 days ago

Euro-area inflation eased more than expected, dipping below the
European Central Bank's
2 per cent target and supporting the case for interest rates to be lowered further.
Consumer prices rose 1.9 per cent from a year ago in May, down from 2.2 per cent in April and below the 2 per cent median estimate in a Bloomberg survey of economists, data Tuesday showed. A core gauge excluding volatile items like food and energy moderated to 2.3 per cent, while pressures in the closely watched services sector cooled markedly.
It's the first time in eight months and only the second since mid-2021 that headline inflation hasn't exceeded the target. Following Russia's invasion of Ukraine and the subsequent energy crisis, it reached a record 10.6 per cent in October 2022.
The numbers arrive on the eve of the ECB's two-day rate meeting. With inflation in check and trade tensions between President Donald Trump and Europe clouding the economic outlook, another quarter-point cut in the deposit rate, to 2 per cent, is almost fully priced.
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'Despite the favourable optics, much of the decline might simply reflect a reversal of temporary pressures April, when the timing of Easter drove up tourism-related costs,' Bloomberg economist Simona Delle Chiaie said. 'Still, several factors – including the lingering effects of US tariffs – suggest further price moderation lies ahead. We expect the ECB to cut rates this week, with a follow-up move likely in September.'
That could be the last easy decision for the Governing Council, however, as policymakers dispute where prices will head next – not just due to tariffs, but also the upcoming jump in European defence and infrastructure outlays. Investors reckon there'll be one more cut this year beyond June.
In the short term, much hinges on trade. Most goods from the European Union are currently subject to a 10 per cent US levy, but that could jump to 50 per cent next month. Brussels has warned it may speed up retaliatory measures if Trump follows through on his tariff threats – the latest of which includes a 50 per cent levy on steel and aluminium imports.
The topic will certainly be on the agenda when German Chancellor Friedrich Merz meets Trump in Washington on Thursday. Due to the uncertainty over how the trade situation will evolve, the ECB will provide scenarios alongside its quarterly projections that day.
In March, it saw inflation slowing to 1.9 per cent in 2026 and 2 per cent and 2027, from 2.3 per cent this year. The euro's surprise advance and softer energy costs have since reinforced the retreat.
Some policymakers have suggested there'll be a downward revision to the projection – feeding a debate over the risk of undershooting 2 per cent. Lithuania's Gediminas Simkus said last week that there's a growing danger of inflation falling short of that goal.
Recent data on workers' pay have added to such concerns. The ECB's wage tracker signals a sharp slowdown in 2025 to levels below what's deemed compatible with 2 per cent inflation. That's despite unemployment holding at a record-low 6.2 per cent in April.
At the same time, consumers' expectations for price growth over the next year have ticked up to 3.1 per cent – the highest since February 2024. – Bloomberg