Annual inflation in the euro zone rose again in May, official data showed on Friday, but the setback is seen as temporary and is unlikely to stop the European Central Bank (ECB) from cutting interest rates next week.
However, the data will weigh on the ECB's actions beyond July and reinforce the view that the bank's decision on June 6 will not be the catalyst for a rapid rate-cutting campaign.
Consumer prices in the single currency area rose 2.6 percent year-on-year in May, according to the European Union's statistics office, a better-than-expected increase from 2.4 percent in April.
This figure is above the ECB's target of 2%.
ECB officials are likely to be disappointed with the data on core inflation, which excludes volatile energy, food, alcohol and tobacco prices as well as key bank measures.
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The rate rose again to 2.9% in May, from 2.7% in April.
Analysts surveyed by FactSet and Bloomberg had expected consumer prices to rise 2.5% and core inflation to remain stable.
The ECB has been raising interest rates aggressively since July 2022 to curb soaring inflation, but has frozen borrowing costs in the past few months amid growing pressure to lower rates.
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Consumer prices have been falling steadily from a peak of 10.6% in October 2022 in the wake of Russia's full-scale invasion of Ukraine and the associated impact on energy costs.
Riccardo Marcelli Fabiani, senior economist at Oxford Economics, said the May hike was “driven by temporary factors and does not mean that deflation has stopped”, adding that it “does not preclude in a clearly communicated way” a cut in June.
“However, given the temporary break in deflation, particularly in the services sector, and positive wage data, the ECB is likely to remain cautious and unlikely to cut interest rates at its July meeting,” he added.
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The ECB is preparing to cut borrowing costs ahead of the U.S. Federal Reserve and is wary of cutting rates again in July.
Bank of Finland Governor Olli Rehn, one of the 25 members of the ECB's governing council, told AFP this month that the bank was “not committing in advance to any interest rate path.”
“May's inflation numbers are a warning that next week may not be the start of a traditional rate-cutting cycle,” said Bert Collin, senior euro zone economist at ING Bank.
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The services sector recorded the strongest price increase at 4.1% in May, up from 3.7% the previous month.
Energy prices had been falling for months, but rose again by 0.3 percent in May after dropping 0.6 percent in April, according to Eurostat.
However, price increases for food, alcohol and tobacco slowed to 2.6% in May from 2.8% in the previous month.
Across the euro zone, Latvia had the lowest inflation rate in May at 0.2%, according to Eurostat data, followed by Finland, which had 0.5% inflation in May.
Belgium had the highest rate at 4.9%.
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