Eurozone inflation falls more than expected

All components contribute to inflation decline

In May, Eurozone inflation unexpectedly fell significantly to 6.1% y/y, from 7.0% y/y previously. Fortunately, for the first time in a long time, all major components contributed to this decline. Thanks to declining prices for oil and gas, the energy component made a slightly negative contribution to inflation. Food price dynamics also continued their downward trend in May, falling to 12.5% y/y (previously 13.5% y/y). Of particular importance from a monetary policy perspective was the further decline in the core rate to 5.3% y/y (previously 5.6% y/y) in May.

Given the unchanged subdued economic outlook for global industry (due to continued destocking), we also expect energy prices to remain subdued. Due to base effects, the dampening impact of energy prices on headline inflation is likely to intensify slightly in 2H.

Since the price dynamics of agricultural commodities are also declining at the global level, the downward trend in food prices should also continue and probably intensify in the second half of the year. Another positive aspect is that the index for calculating food inflation has been showing initial signs of stabilization since March. The continuation of the falling price dynamics in energy and food prices should provide increasing financial relief for lowerincome households, particularly in the coming months. This should gradually ease the pressure in upcoming wage negotiations.

With regard to the core rate, the downward trend widened in May. Not only did the price dynamics for goods continue to decline, but services also saw a slight decrease in dynamics for the first time in a long time. With regard to prices for goods, we expect a continuation of the decline in the coming months, in view of the further rapid decline in producer price inflation. In services, tourism as well as culture and leisure are currently mainly responsible for inflationary pressures. An analysis of detailed data in the course of the month will show whether there has already been a slight trend reversal here in May.

The inflation trend in May was a first step in the desired direction. It is highly likely that the downward trend in inflation for energy, food and goods will continue in the coming months. However, it remains to be seen whether the downward trend in services in particular will continue. In this area, the ECB will keep a particularly critical eye on the development and analyze the individual components closely.

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