Services Prices Take a Step Back

A key factor behind the inflation cooldown was the notable drop in services inflation. After climbing to 4% in April, service prices decelerated to 3.2% in May, marking the lowest level in over three years. The temporary spike seen previously appears to have been influenced by seasonal effects, particularly the Easter holiday.

In parallel, core inflation — which strips out volatile components such as energy, food, alcohol, and tobacco — also softened, moving from 2.7% in April to 2.3% last month.

Crucial Timing Ahead of ECB Policy Meeting

This unexpected inflation dip comes just days before the ECB’s next interest rate decision. The bank previously lowered its deposit rate to 2.25% in April, retreating from the peak of 4% reached in mid-2023.

Market participants are already pricing in a 25 basis point cut at this week’s meeting. Yet the bigger question now is whether this latest data strengthens the case for additional easing in July — and the current outlook suggests it does.

Global Risk Factors Still Loom Large

Despite the cooling inflation in Europe, global economic risks remain elevated. Protectionist trade measures proposed by the U.S., including sweeping tariff adjustments, are raising concerns about international trade disruptions. These policies are likely to impact the European Union as well, adding to economic uncertainty.

While the direct inflationary effects of these tariffs are unclear for now, potential retaliatory actions and prolonged trade tensions could eventually destabilize price stability.

OECD Maintains 2025 Growth Forecast

Amid all this, the OECD has stuck to its prior projections. The organization still expects the euro area to grow by 1% in 2025, with inflation forecasted at 2.2% — unchanged from its earlier outlook. This consistency could give the ECB more room to maneuver in its monetary strategy.

Bond Markets Welcome the Soft Data

Following the release of the inflation figures, eurozone bond yields retreated modestly. Germany’s 10-year bond yield dipped to 2.499%, while France’s equivalent yield settled around 3.169%. The movement reflects market confidence in the ECB’s ability to manage inflation without derailing growth.

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