Euro-Area May CPI Rises 3.2%, Sealing Case for ECB Rate Increase Next Week

Euro-area inflation climbed above 3% for the first time in 2 1/2 years in May, driven by the fallout from the war involving the U.S., Israel and Iran. The jump has all but sealed a European Central Bank rate increase at next week's policy meeting.

Eurostat said June 2 that the euro area's consumer price index rose 3.2% in May from a year earlier. That was up from 3.0% in April and matched economists' median estimate.

Core inflation, which excludes volatile items such as food and energy, rose a stronger-than-expected 2.5%. Services inflation, a key ECB gauge, accelerated to 3.5%. Preliminary data showed energy costs rose 10.9% from a year earlier in May, the biggest increase on record on a monthly basis.

That has put the ECB on course to raise its benchmark rate next week for the first time since September 2023.

ECB officials have been particularly concerned about workers' wage demands and companies' higher selling prices as drivers of inflation. Still, as the war involving the U.S., Israel and Iran drags on, they see such an outcome as increasingly unavoidable.

Policymakers remain cautious about the rate path after June as the Middle East war weighs on euro-area growth. Business activity in Europe contracted in May at the fastest pace since 2023.

Isabel Schnabel, one of the most hawkish members of the ECB's Executive Board, said on June 1 that it was still too early to say how many rate increases may be needed. Lithuania's Gediminas Simkus said two rate hikes were a strong possibility, though the timing remains unclear.

Finland's Finance Minister Olli Rehn said inflation expectations have remained stable so far, but added that action is needed this month to contain price pressures.

Fueled by a surge in energy costs tied to the war, May inflation accelerated to 2.8% in France, 3.3% in Italy and 3.6% in Spain. In Germany, by contrast, inflation slowed to 2.7%.

Kim Jung-a, guest reporter at Hankyung.com, kja@hankyung.com