FRANKFURT (Reuters) – Euro zone inflation rose in May, data showed on Friday, in a sign the European Central Bank still faces a slow and uncertain journey to rein in prices.
The bigger-than-expected increase in inflation was unlikely to stop the ECB from lowering borrowing costs from a record high next week, but may cement the case for a pause in July and a slower pace of interest rate reductions in the coming months.
Consumer prices in the 20 countries that share the euro rose by 2.6% year on year in May, inching away from the ECB’s 2% goal after increases of 2.4% in the previous two months, according to Eurostat’s flash estimate.
Economists polled by Reuters had anticipated a 2.5% increase although an upside surprise was likely after German, French and Spanish readings earlier.
More significantly, a closely watched measure of underlying inflation that excludes food, energy, alcohol and tobacco came in at 2.9% from 2.7% in April.
Prices in the services sector, which some policymakers have singled out as especially relevant because they reflect domestic demand, rebounded to 4.1% from 3.7%.
This was likely to mirror larger-than-expected increases in wages in the first quarter of the year, which have boosted consumers’ battered disposable income after years of below-inflation pay hikes.
The ECB’s biggest ever streak of rate hikes has helped bring down inflation from a whopping 10% in late 2022 and stabilised consumer expectations but it has also choked off credit.
This meant that policymakers meeting next week were likely to stick to well-telegraphed plans to cut rates despite growing market doubts about a global narrative of falling inflation.
