Shoppers buy fresh vegetables, fruit, and herbs at an outdoor produce market under green-striped canopies in Regensburg, Upper Palatinate, Bavaria, Germany, on April 19, 2025.
Michael Nguyen/NurPhoto via Getty Images
Euro zone inflation fell below the European Central Bank’s 2% target in May, hitting a cooler-than-expected 1.9% on sharp declines in services, flash data from statistics agency Eurostat showed Tuesday.
Economists polled by Reuters had expected the May reading to come in at 2%, compared to the previous month’s 2.2% figure.
The closely watched services inflation print cooled significantly to 3.2% last month, compared to the previous 4% reading. So-called core inflation, which excludes energy, food, tobacco and alcohol prices, also eased, falling from 2.7% in April to 2.3% in May.
“May’s steep decline in services inflation, to its lowest level in more than three years, confirms that the previous month’s jump was just an Easter-related blip and that the downward trend in services inflation remains on track,” Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics said in a note.
Inflation has been moving back towards the 2% mark throughout 2025 amid uncertainty for the euro zone economy.
The latest figures will be considered by the European Central Bank as it prepares to make its next interest rate decision later this week. Back in April, the central bank took its key rate, the deposit facility rate, to 2.25% — nearly half of the high of 4% notched in the middle of 2023.
Markets were last pricing in an around 95% chance of interest rates being cut by a further 25-basis-points on Thursday. Given the widely anticipated upcoming interest rate trim, the Tuesday data might not strongly influence this week’s ECB decision, Allen-Reynolds said.
“But May’s inflation data strengthen the case for another cut at the following meeting in July,” he noted.
But the global economic outlook remains muddied. U.S. President Donald Trump’s protectionist tariff plans have been casting shadows over the global economic outlook, with his so-called “reciprocal” duties — which are also set to affect the European Union — widely seen as harmful to economic growth. Their immediate potential impact on inflation is less clear, with central bank policymakers and analysts noting that it could depend on any potential countermeasures.
Despite the transatlantic tumult, the Organisation for Economic Co-operation and Development in its latest Economic Outlook report out on Tuesday said it was expecting the euro area to expand by 1% in 2025, unchanged from its previous forecast. Euro area inflation is meanwhile projected to come in at 2.2% this year, also in line with the March report.
Euro country bond yields were last lower after the fresh inflation data, with the German 10-year bond yield falling by over two basis points to 2.499%, while the yield on the French 10-year bond was last down by more than one basis point to 3.169%.
The euro was meanwhile last around 0.3% lower against the dollar.
(Source)