Euro area inflation continues to pick up in May, core prices nudge up as well

• CPI +3.2% vs +3.2% y/y expected
• Prior +3.0%
• Core CPI +2.5% vs +2.4% y/y expected
• Prior +2.2%

The headline estimate moves up in May, as expected, with energy price inflation being the standout once again. Even though energy prices were down 1.1% on the month, it is still up by 10.9% year-on-year (up from 10.8% in April). Besides that, the monthly estimates show a broadening in the increase in price pressures across the region.

Of note, services inflation was up 0.4% on the month. Meanwhile, inflation for non-energy industrial goods also increased by 0.2% on the month. Food price inflation was flat in May compared to the month before.

Overall, services inflation jumped up to 3.5% (previously 3.0%) with food price inflation holding at 2.0%. The mix sees core annual inflation move back up to 2.5%, in a worrying sign for the ECB.

If the trend continues down this path in the months ahead, rate hikes will definitely have to be put on the table as policymakers have to deal with potential spillover risks from second-round effects. As mentioned before, interest rates in Europe are now still in neutral territory. And even with 50 bps of rate hikes, it barely puts policy into being marginally restrictive.

So if the ECB really wants to bring down inflation, they will have to move more aggressively. The key risk in doing that though is that policymakers risk sinking the economy further. That especially since the US-Iran conflict is already raising the stakes and inviting stagflation risks, especially in the likes of France.

This article was written by Justin Low at investinglive.com.