Inflation is also falling significantly in the euro zone

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The European Statistical Office has estimated the current inflation in the euro area – and it has fallen more significantly than expected. The ECB has formulated an inflation target of 2.0 percent, which is still out of reach.

Fresh vegetables on a market stall in Greece

The surge in prices in the euro area unexpectedly weakened significantly in May. Last month, consumer prices rose by just 6.1 percent year-on-year, according to a first estimate from the statistics office Eurostat on Thursday. Economists had expected higher inflation of 6.3 percent.

In April, the inflation rate had increased slightly to 7.0 percent after 6.9 percent in March. The so-called core rate, which excludes volatile energy and food prices as well as alcohol and tobacco, fell to 5.3 percent in May from 5.6 percent in April.

Energy prices fell 1.7 percent year-on-year in May after rising 2.4 percent in April. Meanwhile, prices for food, alcohol and tobacco rose 12.5 percent after rising 13.5 percent in April. Non-energy industrial goods rose 5.8 percent from 6.2 percent previously. Prices for services increased by 5.0 percent in May after 5.2 percent in April.

Two percent not yet in sight

For the European Central Bank (ECB), which has been fighting inflation with a series of interest rate hikes since July 2022, the waning price surge is positive news. It shows that the tightening course is slowly having an effect on the economy. “A large part of the journey has been completed, but there is still the last piece,” said ECB Vice President Luis de Guindos no talk. The medium-term inflation target of the European Central Bank (ECB) of two percent is still being exceeded.

Most recently, several currency watchdogs 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, which banks receive from the central bank for parking surplus funds, to 3.75 percent in July. It is currently 3.25 percent.

Increase in labor costs as a brake

For Alexander Krüger, the chief economist at Hauck Auffhäuser Lampe, the “now noticeably decreasing price pressure is not rocket science. Especially the Energy prices are creating nice base effects. The price peak for food also seems to have been overcome. Ultimately, however, the inflation situation is causing people to hold their breath instead of taking a deep breath. The ECB will therefore continue to raise key interest rates.”

Commerzbank chief economist Jörg Kramer also points to falling energy prices and considers the decline in core inflation excluding energy and food prices to be “really good news”. However, he warns: “The ECB should not be overjoyed. The rapidly accelerating rise in labor costs should prevent core inflation from falling back into the 2% range in the medium term.”

Thomas Gitzel from VP Bank also believes that the ECB is on the right track, but this is not the end of it: “Since the inflation rates are still above the key interest rate, the work of the European currency watchdogs is not yet finished. Two more will probably follow Interest rate increases of 25 basis points each launched.”

Good trend on the labor market

The unemployment rate in the euro zone also fell slightly in April. The rate adjusted for seasonal fluctuations was 6.5 percent, revised upwards from 6.6 percent in March, Eurostat said on Thursday. Experts polled by Reuters had expected a value of 6.5 percent for April.

A total of 11.088 million people were registered as unemployed in the euro area in April – this was 33,000 fewer than in the previous month and 203,000 fewer than before a year. The unemployment rate in April was particularly low in Germany and Malta, each at 3.0 percent. The value was highest in Greece (12.7 percent) and in Spain with 12.9 percent.

dk/hb (rtr)