Euro zone inflation rose to an estimated 3.2% in May, up from 3% in April, driven by double-digit energy price growth, official data showed on Tuesday.
The figure was in line with forecasts in a Reuters poll of economists and is expected to lock in expectations of an interest rate hike at next week’s European Central Bank meeting.
Energy costs represented the highest annual rate of inflation in May, with prices rising by 10.9% year-on-year, a slight increase from the 10.8% recorded the previous month.
Services inflation rose to 3.5% from 3% in April, while food, alcohol and tobacco prices cooled to 2% from 2.4% the previous month.
Inflation rates varied significantly between individual markets, with Germany seeing annual inflation fall to 2.7% in May from 2.9% in April.
Greece and Lithuania recorded annual inflation rates above 5% last month, while France saw annual inflation rise from 2.5% in April to 2.8% in May.
The data showed inflation in Europe continuing to rise above the European Central Bank’s 2% target as oil and gas prices remain elevated in the wake of the US-Iran war.
Euro zone inflation jumped to 3% in April, up from 2.6% in March, having previously dipped below the 2% threshold prior to the outbreak of the conflict in Iran.
Markets are currently pricing in a 94% chance of the ECB hiking its key interest rate by 25 basis points at its meeting later this month, according to LSEG data.
Following the data release, the euro was flat against the dollar at around $1.164, while the yield on Germany’s 10-year bund fell by 6 basis points.
Carsten Brzeski, global head of macro at ING, said in a note on Tuesday morning that the May inflation data paves the way for an ECB rate hike next week.
“A week ahead of the next ECB meeting, this is the expected uptick in inflation that will motivate the central bank to decide on an ‘insurance’ hike,” he said.
Brzeski added that the Iran war-induced energy shock had “become more permanent,” but noted that oil prices remain lower than levels forecast by many market watchers under a more adverse scenario regarding the length of the war.
“Nevertheless, for inflation in the eurozone, the only way is currently up,” he said. “Not a sharp up but a rather moderate and gradual lift. While knock-on effects from higher energy prices on other prices, like transportation and food, will be hard to avoid, the latest survey-based inflation expectations have come down a bit.”
Europe remains particularly vulnerable to energy shocks given its position as a major net energy importer, a structural weakness that continues to amplify the impact of global supply disruptions.