Eurozone inflation falls sharply in May

Eurozone inflation eased in May, official statistics showed on Tuesday, narrowly missing expectations and putting further pressure on the European Central Bank.

Eurostat, the European Union’s official statistics body, said its first estimate for euro area inflation in May was 1.2%, down on April’s figure of 1.7% and below the 1.3% most economists had forecast.

Of all the components measured, energy had the highest annual rate at 3.8%, although that was considerably down on April’s figure of 5.3%. The second highest component was food, alcohol and tobacco, with a rate of 1.6% compared to 1.5% in April, while services was 1.1% against 1.9% a month earlier.

The core consumer price index, which strips out volatile energy and food prices, also fell sharply, coming in at 0.8% compared to 1.3% a month earlier. Most analysts had been looking for around 1%.

Neil Wilson, chief markets analyst at Markets.com, said: "While we had expected a drop due to seasonal factors, the deceleration in price growth was more severe than forecast."

The data will put further pressure on the ECB, which meets on Thursday to discuss interest rates. It has a target of 2% for inflation but has consistently failed to meet it.

"The absence of any sustained uptick in inflation has persistently dogged the ECB as it seeks to achieve its target," argued Wilson. "This print will only add to the pressure on the ECB to ease further this year.

"Core inflation for 2019 was revised down to 1.2% from 1.4% projected in December. The ongoing lack of inflation uplift may see the staff projections for inflation in 2019 revised lower still.

"The ECB may need to make a very bold step in the easing direction – this week’s meeting could be the last read chance for Draghi to make an impact. We could therefore see the ECB turn more dovish that previously expected, with a shift in forward guidance potentially on the cards to signal that the next move with be down, and not up."

Mario Draghi has been president of the ECB since 2011 but is stepping down later this year.

Connor Campbell, financial analyst at Spreadex, said: "This leaves the central bank with a conundrum heading into Thursday’s statement.” He believes that any increase in interest rates could now be delayed until summer 2020."

European indices responded positively, as investors welcomed any hint of a delay in interest rate hikes, and both the CAC and DAX rose following shaky starts.

The euro eased back from earlier highs, meanwhile, and by noon BST was trading at 0.89 against sterling.