Eurozone inflation slows below expectations in May

Inflation in the Eurozone slowed to 1.9% in May after growing to 2.2% in April and also fell below 2.0% consensus. a fall in energy prices and a sharp decline in services inflation.

Core inflation, which excludes the most volatile components and is closely watched by the central bank for indication about underlying inflation, dipped to 2.3% in May from 2.7% previous month and below expected 2.4% growth.

Drop in energy prices and significant drop in services inflation were mainly behind May’s stronger than expected slowdown in consumer prices.

Lower inflation eases pressure on the European Central Bank which eased its monetary policy seven times in past eleven months and is widely expected to deliver another 25 basis points cut to 2% in the policy meeting on Thursday, June 5.

Steady decline in inflation makes some economists expect that consumer prices may fall below the central bank’s 2% target in coming months, as key factors that contribute to price pressures (low energy prices, strong euro, weak economic growth and almost halted wage growth) point to such scenario.

In such environment, economists expect one more rate cut in 2025 as current rate level is seen as neutral and neither supports nor harm economic growth, however, remain cautious of potential risk of fresh upside pressures, mainly due to unstable geopolitical situation and threats of escalation of trade war.