Inflation in the euro zone rose to an estimated 3.2% in May, official data showed on Tuesday, driven by a double-digit rise in energy prices.
The report is in line with expectations in a Reuters survey of economists, with expectations for a rate hike expected to be confirmed at next week’s European Central Bank meeting.
Energy costs in May were the highest in terms of annual inflation, with prices rising by 10.9%, according to preliminary data. This was a slight increase from the 10.8% growth in euro area energy prices recorded in the previous month.
Services inflation rose to 3.5% from 3% in April, while food, alcohol and tobacco prices fell to 2% from 2.4% the previous month.
Inflation rates also varied widely across individual markets. In Germany, Europe’s largest economy, the annual inflation rate fell to 2.7% in May from 2.9% in April. However, annual inflation rates in Greece and Lithuania exceeded 5% last month. In France, annual inflation rose to 2.8% in May from 2.5% in April.
Tuesday’s print showed Europe’s inflation rate continues to rise above the European Central Bank’s 2% target as oil and gas prices remain elevated due to the war between the United States and Iran.
Eurozone inflation rose to 3% in April from 2.6% in March. Before the outbreak of the Iran conflict, inflation in the euro zone was below the 2% threshold.
As a major net energy importer, Europe is particularly vulnerable to energy shocks.
Markets currently price in a 94% chance that the ECB will raise key interest rates by 25 basis points at its Governing Council meeting later this month, according to LSEG data.
After data release, EUR Against the dollar, it was flat at around $1.164. Germany’s interest rate 10 year bondwidely seen as the euro zone benchmark, fell by 6 basis points.
Carsten Brzeski, global head of macro at ING, said in a note on Tuesday morning that May’s inflation data pave the way for an ECB rate hike next week.
“An expected rise in inflation a week before the next ECB meeting will motivate the central bank to decide on an ‘insurance’ rate hike,” he said.
Brzeski added that the energy shock resulting from the Iran war “has become more permanent,” but noted that under a more unfavorable scenario for the duration of the war, oil prices would still be lower than many market watchers expect.
“Nonetheless, the only way out for inflation in the euro area at the moment is to rise,” he said. “It’s not a sudden rise, it’s a fairly slow and gradual rise. It’s inevitable that rising energy prices will spill over into other prices, such as transport and food, but inflation expectations based on the latest survey have eased slightly.”
