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Eurozone Inflation Hits Highest Level Since 2023 Ahead of ECB Rate Decision

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Eurozone Inflation Hits Highest Level Since 2023 Ahead of ECB Rate Decision

Annual inflation in the eurozone accelerated in May as the Middle East conflict continues to drive energy costs higher, backing expectations that the European Central Bank will raise interest rates next week.

Consumer prices rose 3.2% year over year, up from 3% a month ago and remaining well above the ECB's 2% target, according to Eurostat flash estimates released Tuesday. The latest reading aligns with market expectations and marks the highest inflation rate since September 2023.

Energy prices are still the highest contributor to inflation, with the annual rate ticking up to 10.9% from April's 10.8%. In other segments, inflation in services and non-energy industrial goods rose, while food, alcohol and tobacco price increases slowed.

Excluding energy, food, alcohol and tobacco, the annual inflation stood at 2.5%, higher than the previous month's 2.2% and the expected 2.4%

Across major euro area economies, provisional data for May showed inflation climbing in Spain, Italy and France, while Germany bucked the trend as government interventions to address rising energy costs began to take effect.

Released on Monday, the latest monthly ECB Consumer Expectations Survey showed median inflation expectations for the next 12 months held steady at 4%. Meanwhile, the three-year estimate dipped slightly to 2.9% from 3%, while the expectations for five years ahead remained unchanged at 2.4%.

"Although the still elevated expectations support the ECB's hike in June, the [stabilization] buys the ECB more time to assess the impact of the shock before embarking on a second hike," Danske Bank said in a report ahead of the May inflation print. The ECB is scheduled to hold its monetary policy meetings on June 10 and June 11.

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