Inflation in the Eurozone has dropped below the European Central Bank’s (ECB) target for the first time in recent months. This decline is primarily attributed to lower costs in services and energy. In May, consumer price inflation across the 20 countries using the euro decreased to 1.9%, down from 2.2% in April, falling short of the anticipated 2.0%.
Similarly, underlying inflation, excluding volatile food and fuel prices, also slowed to 2.3% from 2.7%. The ECB has previously reduced interest rates seven times since last June, and a further cut is widely expected in light of stagnant wage growth, declining energy prices, a robust euro, and moderate economic expansion. Analysts point to the disinflationary outlook as sufficient grounds for the ECB to proceed with another rate cut.
According to Riccardo Marcelli Fabiani from Oxford Economics, further easing may follow later this year as inflation remains subdued. However, the picture is complicated by varying short-term and long-term price trends. Some economists predict that inflation could drop below the ECB’s 2% target this year, possibly not rebounding until 2026.
This situation poses a challenge for the ECB, which may have to balance immediate disinflationary pressures with the possibility of future inflationary spikes due to geopolitical tensions and shifts in global trade dynamics. While investors anticipate that the ECB might implement only one additional rate cut in 2023, they remain cautious. Increased tariffs, a declining working-age population, and rising investments related to defense and climate change could contribute to inflationary pressures in the future.
The ECB typically overlooks short-term volatility in prices, focusing instead on a medium-term inflation target, making it crucial for policymakers to remain vigilant.