Eurozone inflation drops below target to 1.9%
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The news: Inflation across the Euro area eased ahead of expectations, falling below the European Central Bank’s 2% target, supporting the case for further interest rate reductions.
The numbers: Consumer prices rose 1.9% from one-year to May, down from 2.2% in April, below Reuters analyst expectations of 2%.
Core inflation, which strips out volatile food and energy prices, fell to 2.3% in May compared to 2.7% in April. Services inflation, a gauge for domestic prices pressures, fell to 3.2% in May from 4% the month prior.
In the first time annual inflation has fallen below the 2% target since September last year, when it briefly dipped to 1.7%, the trend signals the possibility of incoming rate cuts for the region.
The context: The ECB will update inflation forecasts when it makes its rate decision on Thursday this week, having forecast that inflation in the bloc would hold above its medium-term 2% target during 2025, falling to 1.9% in 2026.
A quarter-point cut in the deposit rate, to 2% is almost full priced in, with another two quarter points priced in by the same time next year.
The source: Eurostat
