Inflation in Europe has reached its slowest pace since Russia invaded Ukraine, strengthening the case for the region’s central bank to halt interest rate hikes soon.
According to an initial estimate from the European Union’s statistics agency, consumer prices in the eurozone rose by 6.1% last month compared to a year ago, marking a decline from 7% in April.
This is the lowest inflation rate since February 2022, when global energy prices surged following Russia’s full-scale invasion of Ukraine.
The increase in food prices has moderated for the second consecutive month in May, while energy prices have actually fallen. Core inflation, which excludes food and energy, dropped to 5.3%, its lowest level in four months.
National data published on Wednesday showed a significant decline in inflation in Germany, France, Italy, and Spain. Price increases have slowed across various product categories in Europe’s largest economies.
While this data may lead the European Central Bank (ECB) to consider pausing interest rate hikes, ECB President Christine Lagarde stated on Thursday that there is still work to be done to bring interest rates to sufficiently restrictive levels.
At a banking conference in Germany, Lagarde declared, “Today, inflation is too high, and it will remain so for too long.”
The ECB, along with the US Federal Reserve and the Bank of England, targets inflation of 2%.
May’s figures of inflation in Europe will support those policymakers advocating for the ECB to end its tightening cycle, although some may highlight the persistently high services inflation and the tightness of the labor market.
Eurozone Unemployment Dropped to 6.5%
Eurozone unemployment dropped to 6.5% in April, down from 6.6% the previous month, according to new EU data published on Thursday.
As long as core inflation continues to ease gradually, the ECB is likely to settle for two more interest rate hikes, reaching a peak deposit rate of 3.75%, according to Franziska Palmas, senior Europe economist at Capital Economics.
Separate data released on Tuesday showed that lending by banks in the eurozone remained stagnant in April, with household loans barely growing.
“For the ECB, this provides further evidence that its tightening policy is effective and could give dovish policymakers a stronger argument to call for an end to rate hikes this summer,” said Bert Colijn, senior eurozone economist at ING.
The ECB has raised interest rates by 375 basis points in less than a year, starting from minus 0.5% in July 2022 and reaching 3.25% currently.
