Eurozone inflation cools more than expected, hits 1.9%

Eurozone inflation dropped to 1.9% in May, falling below the European Central Bank’s 2% goal for the first time this year, according to data released Tuesday by Eurostat.

That number came in lower than what Reuters-surveyed economists were expecting — they had forecasted a flat 2%. April’s reading was 2.2%, making this latest figure a noticeable decline.

The biggest drop came from services inflation, which eased to 3.2% in May. That’s down from 4% in April and is the lowest the services category has been in over three years. Core inflation, which takes out volatile categories like energy, food, alcohol, and tobacco, also pulled back, falling to 2.3% from April’s 2.7%.

Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, said the dip in services showed that April’s spike was temporary. “May’s steep decline in services inflation, to its lowest level in more than three years, confirms that the previous month’s jump was just an Easter-related blip and that the downward trend in services inflation remains on track,” Jack said in a note.

ECB weighs Eurozone May numbers ahead of Thursday rate decision

ECB officials are expected to cut rates this Thursday, with markets already pricing in a 95% chance of a 25-basis-point reduction. The current deposit facility rate sits at 2.25%, slashed from the 4% high reached in mid-2023.

Even though the latest data confirms a cooling trend, Jack thinks it won’t change the ECB’s decision this week much, as their mind is already made up. “But May’s inflation data strengthen the case for another cut at the following meeting in July,” he added.

Meanwhile, the overall Eurozone economy is still facing serious uncertainties, thanks mostly to US President Donald Trump, who is pushing new tariff plans that are rattling global markets. His proposal for “reciprocal duties” includes targeting European Union exports.

In the middle of all this, the OECD released its latest Economic Outlook on Tuesday, predicting the euro area will grow by 1% in 2025, which is unchanged from its last forecast. The OECD also expects Eurozone inflation to end the year at 2.2%, the same projection it gave in March.

Bond yields dropped across the region right after the data came out. The German 10-year bond yield slipped by more than two basis points to 2.499%, while the French 10-year yield dropped by over one basis point to 3.169%. Traders saw this as a clear sign that more easing might be ahead.

The euro also plunged, decreasing by about 0.3% against the dollar by Tuesday afternoon, according to data from CNBC. This continues a trend from earlier months, where signs of softer inflation typically led to weaker currency performance.