Inflation in the euro area moderates surprisingly sharply in May

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ECB President Christine Lagarde

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THOMAS LOHNES / AFP

Inflation in the euro area has eased significantly thanks to falling energy prices. Consumer prices rose by only 6.1 percent in May within a year, as the statistics office Eurostat announced on Thursday in an initial estimate. In important eurozone countries such as Germany, France and Italy, the price surge even slowed considerably.

The decline in the inflation rate was also stronger than expected. Economists had expected higher inflation of 6.3 percent. As recently as April, the inflation rate in the 20-country community had risen slightly to 7.0 percent, down from 6.9 percent in March.

These are positive messages for the European Central Bank (ECB). Nevertheless, ECB President Christine Lagarde made it clear that the job is not done yet. "The ECB will be relieved. Inflation is heading in the right direction – downwards," said Thomas Gitzel, Chief Economist at VP Bank. However, inflation rates are still above the key interest rate, so the work of the European monetary authorities is not yet finished. Alexander Krüger, chief economist at Hauck Aufhäuser Lampe, expressed a similar view. After the previously steep rise, the now noticeably easing of price pressure is "not rocket science," he noted. Ultimately, the inflation situation "continues to provide for a breath of fresh air instead of a breath of fresh air." Krüger expects that the ECB will therefore continue to raise interest rates.

Inflation target of two percent is still a long way off

Since July 2022, the European Central Bank has been bracing itself against high inflation with a series of seven interest rate hikes in a row. The sharp decline in inflation shows that the tightening course is slowly having an effect on the economy. However, there can be no talk of an all-clear yet. After all, the ECB's medium-term inflation target of two percent is still a long way off.

Most recently, several monetary watchdogs had considered it likely that the ECB would raise interest rates by a further 0.25 percentage points in June and July. This would increase the deposit rate that banks receive from the central bank for parking excess funds to 3.75 percent in July. It currently stands at 3.25 percent.

ECB President Lagarde made it clear on Thursday at the Savings Banks Day in Hanover that the central bank is determined to bring inflation down to the medium-term target of two percent in the near future. "Therefore, we need to continue our hiking cycle until we have enough confidence that inflation is on the right track," she said. There is no clear evidence that underlying inflation has peaked. In this so-called core inflation are the volatile prices for energy. Food, alcohol and tobacco excluded.

Problematic increase in labour costs

Commerzbank Chief Economist Jörg Krämer also focuses on core inflation. This measure of inflation, which is particularly important to the monetary authorities, fell to 5.3 percent in May from 5.6 percent in April. The core rate is considered a good indicator of the inflation trend. The really good news, according to Krämer, is "that core inflation excluding energy, food and beverages has fallen significantly for the first time in a long time, with it estimated that only one-third of the decline is due to the 'Deutschland-Ticket'". In his view, however, the ECB should not rejoice too soon. The rapidly accelerating rise in labor costs should prevent core inflation from falling back into the two percent range in the medium term, the expert believes.

Energy prices, which were largely responsible for last year's massive surge in inflation, fell by 1.7 percent year-on-year in May after rising by 2.4 percent in April. The upward trend in food and luxury food prices remained strong, even though it eased somewhat in May. Prices for food, alcohol and tobacco rose by 12.5 percent after an increase of 13.5 percent in April. The prices of non-energy industrial goods rose by 5.8 per cent from 6.2 per cent previously. Prices for services rose by 5.0 percent in May after 5.2 percent in April.

kig/Reuters