Euro zone inflation eased more than expected last month as underlying price growth also slowed, backing arguments for only cautious further rate hikes as the fastest ever European Central Bank monetary tightening cycle starts to take effect.
Inflation in the 20 nations sharing the euro eased to 6.1% in May from 7.0% in April, below expectations for 6.3% in a Reuters poll of economists.
The reading came as only a modest surprise for investors, however, as national data earlier this week foreshadowed the drop.
Core inflation, which excludes volatile food and fuel prices and which has played an increasing role in the ECB's policy deliberations, fell to 5.3% from 5.6%, coming well under expectations for 5.5%.
The ECB has raised base rates by a combined 375 basis points to 3.25% over the past year to combat runaway prices.
But with underlying price pressures having built throughout 2023 even as overall inflation has been on a declining path, the central bank has essentially committed to another 25 basis point rate hike on June 15.
Several influential policymakers, including the central bank governors of Germany, the Netherlands and Ireland, have also put a July rate hike on the table, but there is wide agreement that the outlook beyond that is too murky to commit.
ECB Vice-President Luis de Guindos said on Thursday that, while the bank had gone through most of its monetary policy tightening to bring inflation back to its medium-term target of 2%, the cycle was not quite over yet.
While Thursday's benign price data add to the case for caution, Europe's inflation problem is far from solved as price growth for many core items, particularly services, remains stubbornly high.
Services inflation slowed to 5.0% from 5.2% while price growth for industrial goods eased to 5.8% from 6.2%, still excessive but both moving in the right direction.
The ECB is also likely to take some comfort from the slowdown in food inflation to 12.5% from 13.5% as pressures on that front were still expected to build for some time.
Source : Reuters
