FRANKFURT (Reuters) – Eurozone price inflation slowed somewhat more sharply than expected in May and core inflation also eased, bolstering the case for a moderation in the rise rates from the European Central Bank (ECB).

Prices rose 6.1% year on year last month in the 20 countries sharing the European currency, after 7.0% in April, show first estimate data released Thursday by Eurostat, the European statistics institute. .

Economists polled by Reuters expected a slightly less pronounced decline, to 6.3%.

Excluding the most volatile items, unprocessed food and energy, inflation also fell to 6.9% from 7.3% last month.

The rise in prices excluding food, energy, alcohol and tobacco rose from 5.6% to 5.3%, below the Reuters consensus of 5.5%.

It is widely expected that the ECB will again raise its key rates by a quarter of a point at its next meeting in the face of the underlying tensions which have increased throughout the year.

Several influential members of the institution, including the presidents of the central banks of Germany, the Netherlands and Ireland, have also mentioned an additional increase in July, but all agree that the outlook beyond this date are too uncertain to make a commitment.

Stubborn tensions in services

ECB Vice President Luis de Guindos said on Thursday that while the institute has achieved most of the monetary tightening, the cycle of hikes is not quite complete yet.

The rise in the prices of basic products, in particular of services, remains in fact tenacious.

Services prices increased by 5.0% year on year in May after 5.2% in April and for industrial goods, the annual increase was 5.8% after 6.2% the previous month. The trend is going in the right direction but at a slow pace.

The ECB should find some comfort in the slowdown in inflation for food, alcohol and tobacco, down one percentage point to 12.5%, and in the move into negative territory in the evolution of food prices. energy, down 1.7% after rising 2.4% in April.

“The outlook for inflation in Europe is strongly influenced by two opposing factors,” said Carsten Brzeski at ING.

“The larger-than-expected drop in energy prices after a mild winter is likely to push headline inflation down faster than recent forecasts suggest,” the economist said. “On the other hand, recent wage settlements and continued pressure in services should keep core inflation high.”

Wage growth is hovering between 5% and 6%, twice the rate that would be compatible with the ECB’s inflation target of 2%.

The labor market in the European Union is exceptionally tight and companies, especially in services, are reporting growing labor shortages, posing a threat to the European economy.

(Balazs Koranyi, Laetitia Volga, edited by Kate Entringer and Blandine Hénault)

Copyright © 2023 Thomson Reuters