Eurozone's Inflation Headache Intensifies: May Data Signals Rate Cut Pause Beyond June
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- September 03, 2025
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The Eurozone is once again grappling with an unwelcome surge in inflation, as fresh data reveals a significant quickening in May. This latest development is casting a long shadow over the European Central Bank's (ECB) anticipated interest rate trajectory, making any cuts beyond June look increasingly improbable.
The headline figure for consumer price growth jumped to 2.6% year-on-year in May, up from 2.4% in April.
This acceleration pushes inflation further beyond the ECB's comfort zone, complicating an already delicate balancing act for policymakers. Even more concerning for central bankers is the rise in core inflation, which strips out volatile energy and food prices, climbing to 2.9% from 2.7%.
While a quarter-point rate cut by the ECB in June is still widely expected – indeed, almost a certainty in the eyes of many market watchers – the path for July and beyond has become significantly murkier.
Prior to these figures, some analysts had penciled in a follow-up cut in July, but the latest inflation print strongly suggests such a move is now off the table. The market has reacted by significantly scaling back expectations for a July cut, with the probability now hovering around 30%.
Policymakers themselves have been vocal about the need for caution.
Isabel Schnabel, a prominent member of the ECB's Executive Board, recently warned against pre-committing to any specific rate path beyond the widely anticipated June adjustment. Her comments, made just ahead of the inflation data, underscore the internal debate and the data-dependent approach the ECB is committed to.
A primary driver behind this renewed inflationary pressure appears to be the services sector, where prices surged by 4.1% in May, a notable increase from April's 3.7%.
This rise is largely attributed to robust wage growth, which is feeding into higher costs for businesses and subsequently higher prices for consumers. While energy inflation also turned positive for the first time in months (0.3% from -0.6%), and food price growth eased slightly (2.6% from 2.8%), it is the persistent strength in services that remains the biggest headache for the ECB.
In essence, the Eurozone's battle against inflation is far from over.
While the ECB seems poised to deliver its first rate cut in nearly five years next month, the latest economic indicators suggest that further easing will be a much tougher call, as policymakers remain vigilant against deeply entrenched price pressures.
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