Uptick in European inflation clouds outlook for interest rate cuts
By Anna Cooban, CNN
London (CNN) — Inflation in Europe has ticked up for the first time in five months, casting doubt on the possibility of a steady stream of interest rate cuts by the European Central Bank over the next few months.
Annual consumer price inflation in the 20 countries that use the euro rose to 2.6% in May from 2.4% in April, according to preliminary estimates published by the European Union’s statistics office on Friday. That came in slightly above the 2.5% uptick expected by analysts polled by Reuters.
The jump was driven by a rise in services inflation to 4.1% in May, up from 3.7% in April, and its highest level since October.
Core inflation, which strips out volatile products such as energy and food, rose to 2.9% in May from 2.7% the month prior, the preliminary data showed.
The European Central Bank began hiking rates in July 2022 to curb runaway inflation sparked by the reopening of the world’s economies following the pandemic as well as Russia’s full-scale invasion of Ukraine.
It is still widely expected to start reducing the record cost of borrowing at its meeting on June 6, but Friday’s numbers — which show inflation still tracking above the central bank’s 2% target — has cast doubt among some analysts about what happens thereafter.
“May’s increases (in inflation) won’t stop the ECB from cutting interest rates next week. But another reduction (in rates) in July is now looking unlikely,” Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, wrote in a Friday note.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said Friday’s data “comprehensively kill off any hopes of a second rate cut over the summer, in July.”
“Services is now by far the main driver of above-target inflation in the (eurozone), and has been for a while… we struggle to see a return to 2% (inflation), pointing to a more restrictive policy stance from the ECB — and for longer — than markets expect,” he wrote in a note Friday.
All 82 economists polled by Reuters ahead of Friday’s inflation data expected the ECB to cut rates by a quarter of a percentage point next week. Over two-thirds, 55 of 82, expected two more cuts this year, in September and December.
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