Euro Area Inflation Eases More Than Expected in May
Bottom line:
Inflation in the euro area continued to ease in May, surpassing expectations, according to the flash figures released. The annual headline inflation rate fell to 6.1% in May, down from 7% in April, reaching its lowest level since February 2022. Economists polled by Reuters had predicted a May reading of 6.3%. Core inflation, which excludes energy and food prices, also fell more than expected, dropping to 5.3% from 5.6%.
Key Numbers
EURO ZONE MAY CORE CPI INFLATION
Rises 5.3% Y/Y; EST. 5.5%; PREV. 5.6%
EURO ZONE MAY CPI INFLATION
Fell to 6.1% Y/Y EST. 6.3%; PREV 7.0%
Main points
National data revealed that inflation in Germany and France decreased more than forecasted in May, with prices dipping from the previous month. Inflationary pressures in the largest economies of the euro area have now reached 12-month lows. Spain and Italy also experienced easing inflation. Financial markets reacted mildly to the euro zone announcement, with European stocks trading higher, and the euro strengthening against the US dollar and British pound.
In a speech in Hanover, European Central Bank (ECB) President Christine Lagarde emphasized that inflation is still “too high” and expected to remain so for an extended period. The ECB is scheduled to meet on June 15 to make its latest monetary policy decision. While the ECB did not provide forward guidance following its May meeting, it highlighted the presence of strong underlying price pressures.
Money markets have priced in two more 25 basis point interest rate hikes by the ECB, with one expected in June and another in either July or September. According to Bundesbank President Joachim Nagel, several additional rate hikes are anticipated to control inflation. Economists point out that key drivers of inflation have shown improvement in recent months, and there should be a more significant period of disinflation over the summer as energy inflation drops sharply due to base effects. However, the upward trend in wages remains a concern.
The euro area annual inflation rate for May is expected to be 6.1%, down from 7.0% in April. Looking at the main components of inflation, food, alcohol, and tobacco are projected to have the highest annual rate in May (12.5%, compared to 13.5% in April), followed by non-energy industrial goods (5.8%, compared to 6.2% in April), services (5.0%, compared to 5.2% in April), and energy (-1.7%, compared to 2.4% in April).
The main components of inflation, weighted for 2023, show that services account for approximately 43.5% of household final monetary consumption expenditure in the euro area, making it the largest component. Non-energy industrial goods follow with around 26.3% weight. Food, alcohol, and tobacco, as well as energy, contribute around 20.0% and 10.2% respectively. Although they comprise less than one-third of euro area expenditure, fluctuations in their prices can have significant impacts on the headline inflation.
General disclosures: This research is for our clients only. Other than disclosures relating to World Trade Securities, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst’s judgment. World Trade Securities conducts a global full-service, integrated investment banking, investment management, and brokerage business. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research, unless otherwise prohibited by regulation or World Trade Securities policy. The views attributed to third party presenters at World Trade Securities arranged conferences, including individuals from other parts of World Trade Securities, do not necessarily reflect those of Global Investment Research and are not an official view of World Trade Securities. Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report. This research is focused on investment themes across markets, industries and sectors. It does not attempt to distinguish between the prospects or performance of, or provide analysis of, individual companies within any industry or sector we describe. Any trading recommendation in this research relating to an equity or credit security or securities within an industry or sector is reflective of the investment theme being discussed and is not a recommendation of any such security in isolation. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options and futures disclosure documents which are available from World Trade Securities sales representatives.
© 2023 World Trade Securities. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The World Trade Securities L.P team.