Inflation in Eurozone rises higher

Euro zone inflation rose to 2.6% in May, exceeding forecasts and complicating the ECB's efforts to control prices. Despite this, the ECB is likely to cut rates next week but may pause further cuts in July. Core inflation and service sector prices also increased, driven by higher wages. German bond yields hit a six-month high, with markets pricing in 57 basis points of ECB rate cuts in 2024.

Admin Admin May 31, 2024 243 0

Euro zone inflation rose to 2.6% year-on-year in May, higher than the 2.5% forecast, marking an increase from the previous two months' 2.4%, according to Eurostat's flash estimate. This rise complicates the European Central Bank's (ECB) efforts to control inflation, but is unlikely to prevent an anticipated rate cut next week. Instead, it may lead to a pause in July and slower rate reductions moving forward. Core inflation, excluding food, energy, alcohol, and tobacco, increased to 2.9% from April's 2.7%, with service sector prices jumping to 4.1% from 3.7%, likely driven by higher wages.

"These numbers strengthen the hands of those who say we need to be cautious," Dirk Schumacher, an economist at Natixis, said.

ECB combating inflation

The ECB has been combating high inflation, which peaked at 10% in late 2022 due to energy price surges post-Russia's invasion of Ukraine, through an extensive series of rate hikes. Although these hikes have moderated inflation and stabilized consumer expectations, they have also restricted credit. Despite market doubts about global inflation trends, policymakers are expected to adhere to their plan for rate cuts, with forecasts suggesting two more cuts by year-end if inflation declines in the third quarter as anticipated.

"We think that the latest inflation and wage figures decrease the likelihood of back-to-back interest rate cuts in July, but we see the ECB cutting rates twice more before the end of the year if the downward trend in inflation resumes during the third quarter as expected," said Diego Iscaro, head of European economics at S&P Global Market Intelligence.

German government bond yields

Following the inflation data, German government bond yields hit a six-month high. Markets are currently pricing in a total of 57 basis points of ECB rate cuts in 2024, including a 25 basis point cut in June and another by the year's end, though expectations for a third cut this year are diminishing.