Euro zone inflation rose to an estimated 3.2% in May, driven by double-digit energy price growth, official data showed on Tuesday. <\/p>\n
The print, which was in line with forecasts in a Reuters poll of economists, is expected to lock in expectations of an interest rate hike at next week’s European Central Bank meeting. <\/p>\n
Energy costs represented the highest annual rate of inflation in May, according to the flash data, with prices rising by 10.9% \u2014 a slight rise from the euro zone’s 10.8% energy price growth recorded the previous month. <\/p>\n
Services inflation rose to 3.5% from 3% in April, while food, alcohol and tobacco prices cooled to 2% from 2.4% the previous month. <\/p>\n
Inflation rates also varied drastically between individual markets. Germany, Europe’s biggest economy, saw annual inflation fall to 2.7% in May from 2.9% in April. But Greece and Lithuania’s annual inflation rates rose above 5% last month. In France, annual inflation rose from 2.5% in April to 2.8% in May. <\/p>\n
Tuesday’s print showed inflation in Europe is continuing to rise above the European Central Bank’s 2% target as oil and gas prices remain elevated in the wake of the U.S.-Iran war. <\/p>\n
Inflation in the\u00a0euro zone jumped<\/a> to\u00a03% in April, up from 2.6% in March. Prior to the outbreak of the conflict in Iran, inflation in the euro area had dipped below the 2% threshold.<\/p>\n Europe is particularly vulnerable to energy shocks as a major net energy importer.<\/p>\n Markets are currently pricing in a 94% chance of the ECB hiking its key interest rate by 25 basis points at its meeting later this month, according to LSEG data. <\/p>\n Following the data release, the euro<\/a> was flat against the dollar at around $1.164. The yield on Germany’s 10-year bund<\/a>, broadly seen as a benchmark for the euro zone, fell by 6 basis points. <\/p>\n Carsten Brzeski, global head of macro at ING, said in a note on Tuesday morning that the May inflation data paves the way for an ECB rate hike next week. <\/p>\n “A week ahead of the next ECB meeting, this is the expected uptick in inflation that will motivate the central bank to decide on an ‘insurance’ hike,” he said. <\/p>\n Brzeski added that the Iran war-induced energy shock had “become more permanent,” but noted that oil prices remain lower than levels forecast by many market watchers under a more adverse scenario regarding the length of the war. <\/p>\n “Nevertheless, for inflation in the eurozone, the only way is currently up,” he said. “Not a sharp up but a rather moderate and gradual lift. While knock-on effects from higher energy prices on other prices, like transportation and food, will be hard to avoid, the latest survey-based inflation expectations have come down a bit.”<\/p>\n