Eurozone Inflation: May 2025 Update
- Inflation in the euro zone unexpectedly decreased to 1.9% in May, according to flash data released Tuesday by Eurostat. This figure falls below the European Central Bank's (ECB)...
- Economists surveyed by Reuters had predicted a May reading of 2%, a slight decrease from April's 2.2%.
- Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, noted the steep decline in services inflation.
Eurozone inflation unexpectedly dipped to 1.9% in May, sinking below the European Central Bank’s 2% target, primarily due to a sharp drop in services inflation. This crucial development is set to amplify expectations for an impending interest rate cut, according to the latest data.Core inflation also cooled, signaling broader easing. Economists, including those at News Directory 3, are closely watching these figures, with many anticipating the ECB will act. With global uncertainties, like potential U.S. tariffs, looming, and despite the OECD’s 1% growth forecast for 2025, bond yields and the euro are feeling the impact. discover what’s next for monetary policy in the Eurozone.
Euro Zone Inflation Dips Below ECB Target, Bolstering Rate Cut Expectations
Updated June 3, 2025
Inflation in the euro zone unexpectedly decreased to 1.9% in May, according to flash data released Tuesday by Eurostat. This figure falls below the European Central Bank’s (ECB) target of 2%,primarily due to sharp declines in services. The latest figures on euro zone inflation will be closely watched by economists.
Economists surveyed by Reuters had predicted a May reading of 2%, a slight decrease from April’s 2.2%. The cooling of services inflation, a closely monitored metric, played a significant role in the overall drop. Core inflation, which excludes volatile energy, food, tobacco and alcohol prices, also saw a decrease, moving from 2.7% in April to 2.3% in May.
Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, noted the steep decline in services inflation. He saeid the drop, reaching its lowest level in over three years, confirms the downward trend remains intact.
The ECB is expected to consider these figures as it prepares for its upcoming interest rate decision later this week. In April, the central bank lowered its key rate, the deposit facility rate, to 2.25%. Markets are currently pricing in a high probability of a further 25-basis-point rate cut on Thursday. Though, Allen-Reynolds suggests that the May inflation data strengthens the argument for another cut at the subsequent meeting in July, influencing future monetary policy.
Global economic uncertainties persist, particularly regarding U.S. President Donald Trump’s proposed protectionist tariffs. These “reciprocal” duties, impacting the European Union, are widely viewed as potentially detrimental to economic growth. The immediate impact on inflation remains unclear, with policymakers and analysts suggesting it could depend on potential countermeasures.
Despite these concerns, the Organisation for Economic Co-operation and Development (OECD) maintains its forecast for the euro area to expand by 1% in 2025. The OECD’s latest economic Outlook report, released Tuesday, also projects euro area inflation to reach 2.2% this year, consistent with its March forecast.
Following the release of the inflation data, euro country bond yields experienced a decrease.The German 10-year bond yield fell by over two basis points to 2.499%, while the French 10-year bond yield decreased by more than one basis point to 3.169%. The euro also weakened against the dollar, trading approximately 0.3% lower.
What’s next
The European Central Bank is poised to make its next move on interest rates, with many expecting a cut.the latest inflation figures will likely fuel further discussions about the pace and extent of future monetary easing to stimulate economic growth in the euro zone.