A warning shot for the ECB

The inflation rate in the eurozone has not fallen for two months.

Dr. Vincent Stamer

Commerzbank Economic Research

May 31 2024

In May, it even rose again from 2.4% to 2.6%. More importantly, the core rate also halted its downward trend in May, rising from 2.7% to 2.9%. For the ECB, this data, like the surprising stronger rise of negotiated wages in the first quarter, comes at an inopportune time, as it has already announced a cut in key interest rates for June. At the press conference, ECB President Lagarde will probably justify the rate cut primarily on the basis of the medium-term inflation outlook. However, according to our forecast, this is not very rosy either, as the core rate is likely to settle at 3% rather than 2% towards the end of the year.

According to preliminary data from Eurostat, the inflation rate rose from 2.4% in April to 2.6% in May, ending the downward trend of the last year and a half. This is above the average expectations of the economists surveyed in advance (Table 1). The increase was largely due to the fact that the core inflation rate, i.e. the inflation rate excluding energy and food, surprisingly rose from 2.7% in April to 2.9% in May. By contrast, the year-on-year rate for food prices fell from 2.8% in April to 2.6%. The effect of energy prices, which had dampened inflation in previous months, had hardly any effect on inflation in May, with a rate of 0.3%.

In recent months, falling energy prices compared to the previous year and decreasing pressure on food prices had dampened inflation overall. Energy prices had been falling year-on-year for around a year – in some cases very significantly. Partly because a weak monthly figure was excluded from the year-on-year comparison, the rate of change for energy was around zero at 0.3% in May. However, the rate of change for food and beverages fell only slightly from 2.8% in April to 2.6% in April. Fresh food in particular, such as fruit and vegetables, appear to be driving up prices at the moment.

The core rate rises surprisingly

The inflation rate excluding energy, food and beverages had fallen since its peak in March 2023. In May, it has now risen from 2.7% in April to 2.9%. Underlying inflation has already picked up again since the start of the year, particularly in services (Chart 1). As these are particularly labor-intensive, the recent high wage settlements have had a particularly strong impact on them. According to Eurostat, wages increased by 4.7% in the first quarter of 2024 compared to the same period of the previous year. The short-term momentum for goods (excluding energy and food) has recently stabilized.