Brussels (Brussels Morning Newspaper) – Despite longer-term pricing pressures fueled by global trade tensions, statistics released on Tuesday indicated that eurozone inflation dropped below the European Central Bank’s goal last month, supporting predictions for another interest rate cut this week.
In May, consumer price inflation in the 20 euro-sharing nations fell to 1.9% from 2.2% in April, falling short of the 2.0% forecast due to a strong dip in services inflation and a drop in energy costs.
Why did Eurozone inflation fall below ECB’s target?
According to Eurostat, the EU statistics office, a more carefully monitored indicator of underlying inflation, or prices excluding volatile fuel and food prices, declined from 2.7% to 2.3%. This was mostly due to a reduction in the increase of services costs, which decreased from 4.0% to 3.2%.
Since last June, the ECB has lowered interest rates seven times, and Thursday’s action is nearly completely priced in given the weakening of inflation-related indicators like sluggish wage growth, falling energy costs, a strong euro, and lackluster economic growth.
Some experts even predict that inflation will continue to fall below the ECB’s 2% target this year and not rise again until sometime in 2026 since price pressures are so weak.
Is the ECB likely to cut rates again
Experts say this presents a problem for the ECB since the short- and long-term outlooks for prices diverge significantly, as a number of events farther out might push inflation higher. Investors believe the ECB will halt rate reduction after June and just make one more this year, maybe in the fall, because of this.
The fact that interest rates are currently firmly in the “neutral” range, where they neither slow nor promote economic development, is another reason why some people should pause and consider the potential effects of the unpredictable U.S. trade policy on pricing and growth.
What role does service inflation play in slowdown?
Given the exceptionally high global tensions, policy hawks have also cautioned that inflation may soon rise again. Price increases are anticipated as a result of deglobalization, higher tariffs, a trade war, and the reconfiguration of corporate value chains. Price pressures may also be increased by spending on defence and climate change, as well as by the ongoing fall in the working-age population.
Since the ECB targets inflation in the medium term—a vaguely defined word that often implies one to two years out—it is now unclear how these competing patterns will affect ECB policy. However, the ECB typically looks past short-term price volatility.
