The annual rate of inflation in the eurozone fell more than expected in May, giving new arguments for a more cautious increase in interest rates by the European Central Bank, Reuters and Agerpres report.

Eurostat annual inflation fell to 6.1% in May 2023 from 7% in April, according to a preliminary estimate published by Eurostat on Thursday.

The figure announced by Eurostat is lower than the estimates of analysts who expected inflation to stagnate at the level of 6.3%.

Eurostat data showed that core inflation, the inflation that remains after the prices of volatile goods such as energy and food, also fell to 5.3% in May from 5.6% in April, also below estimates analysts who expected to be ahead. 5.5%.

Core inflation is a measure that the ECB monitors closely when developing its monetary policy decisions.

The ECB will raise its key interest rate again this month

Over the past 12 months, the ECB has raised its policy rate by 375 basis points, to 3.25%, to combat accelerated price growth. The Frankfurt institution practically committed to increase by another 25 basis points at the next monetary policy meeting on June 15.

Several influential members of the ECB’s governing council, such as the heads of the central banks of Germany, the Netherlands and Ireland, have even raised the question of a further hike in July, but there is broad consensus that the longer-term outlook is too attractive. make any commitments.

ECB Vice President Luis de Guindos said on Thursday that while the euro’s guardians had completed most of their cycle of monetary tightening to bring inflation back to the medium-term target of 2%, the cycle was far from over.

Even if data released Thursday by Eurostat offered fresh arguments for caution, Europe’s inflation problem is far from over, given that rates of price growth in many important categories, especially services, remain stubbornly high.

Food prices have been rising more slowly, but many problems remain

According to preliminary data, inflation in the services sector slowed to 5% in May from 5.2% in April, while the rate of growth in the prices of manufactured goods slowed to 5.8% from 6.2% in April, both too high numbers, even if reduced. the trend is good.

On the other hand, good news for the ECB is the slowdown in the growth rate of food prices, which registered 12.5% ​​growth in May compared to 13.5% in April.

“The inflation forecast in Europe is strongly influenced by two opposing trends. On the one hand, lower-than-expected energy prices due to a mild winter are likely to push core inflation down faster than expected. On the other hand, however, recent wage agreements and the pressure that still exists from service prices are likely to keep core inflation high,” says ING economist Carsten Brzeski.

The rate of wage growth in the Eurozone remains in the range of 5%-6%, which is twice the level that would correspond to the ECB’s inflation target.

But wages should rise after inflation has hurt real incomes for several years, and the ECB hopes that when inflation slows, wage growth will follow a similar trend so that they offset each other.

Even if this scenario is likely, the labor market in the EU bloc is extremely tight, and companies, especially in the services sector, are reporting problems filling vacant jobs, posing a risk to higher wages and, as a result, inflation.

Another possible cause for concern for the ECB is that the pace of economic growth does not appear to be as robust as expected, particularly in the manufacturing sector, with several indicators showing that the slowdown in industrial production is affecting the economy as a whole, even as the services sector going through a period of upswing.