Market Analysis

In May, data revealed that inflation in the Euro zone accelerated, indicating a challenging path ahead for the European Central Bank in managing price increases.

The larger-than-expected rise in inflation is unlikely to deter the ECB from lowering borrowing costs next week from record highs. However, it may prompt a pause in July and a more gradual approach to future interest rate cuts.

According to Eurostat's preliminary estimate, consumer prices across the 20 euro-sharing countries increased by 2.6% year-on-year in May, moving further away from the ECB's 2% target after consecutive months of 2.4% increases. Economists surveyed by Reuters had forecasted a 2.5% rise, but stronger-than-expected figures followed earlier reports from Germany, France, and Spain.

A significant indicator of core inflation, which excludes volatile items like food, energy, alcohol, and tobacco, rose to 2.9% in May from 2.7% in April. Prices in the services sector, seen as a gauge of domestic demand, rebounded to 4.1% from 3.7%.

This increase likely reflects higher-than-expected wage growth in the first quarter of the year, boosting disposable incomes that had been stagnant due to years of below-inflation pay hikes.

Despite the ECB's extensive series of rate hikes, which have helped tame inflation from highs of 10% in late 2022 and stabilize consumer expectations, credit conditions remain tight. This backdrop is expected to support the ECB's decision next week to proceed with planned rate cuts, despite mounting skepticism in global markets about a broader trend of declining inflation.

Paraphrasing text from "Reuters" all rights reserved by the original author.