Euro zone inflation fell below the European Central Bank’s 2% target in May, hitting a cooler-than-expected 1.9% on sharp declines in services, flash data from statistics agency Eurostat showed Tuesday.
The closely watched services inflation print cooled significantly to 3.2% last month, compared to the previous 4% reading.
Inflation has been moving back towards the 2% mark throughout 2025 amid uncertainty for the euro zone economy.
“But May’s inflation data strengthen the case for another cut at the following meeting in July,” he noted.
Euro area inflation is meanwhile projected to come in at 2.2% this year, also in line with the March report.
Following steep drops in services, euro zone inflation dropped below the European Central Bank’s 2 percent target in May, reaching a lower-than-expected 1 point 9 percent, according to flash data released by statistics agency Eurostat on Tuesday.
The Reuters poll of economists predicted that the May reading would be 2 percent, down from 2 percent the month before.
After reading 4 percent last month, the widely followed services inflation figure dropped sharply to 3 point 2 percent. The price of energy, food, tobacco, and alcohol are not included in so-called core inflation, which decreased from 2 percent in April to 2 percent in May.
As stated in a note by Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, “May’s steep decline in services inflation, to its lowest level in more than three years, confirms that the previous month’s jump was just an Easter-related blip and that the downward trend in services inflation remains on track.”.
Throughout 2025, inflation has been returning to the 2 percent threshold amidst economic uncertainty in the euro zone.
As it gets ready to make its next interest rate decision later this week, the European Central Bank will take the most recent numbers into account. In April, the central bank reduced the deposit facility rate, which is its primary rate, to 2.25 percent, which is almost half of the peak of 4 percent set in mid-2023.
There was a 95 percent chance that interest rates would be lowered by an additional 25 basis points on Thursday. The ECB’s decision this week may not be significantly impacted by the Tuesday data, according to Allen-Reynolds, given the much-anticipated impending interest rate cut.
“However, the inflation data from May makes the case for another cut at the next meeting in July,” he said.
However, the outlook for the world economy is still unclear. The U. S. The global economic outlook has been clouded by President Donald Trump’s protectionist tariff plans. His so-called “reciprocal” duties, which will also impact the European Union, are generally viewed as detrimental to economic growth. It is unclear how they might affect inflation right away; analysts and central bank policymakers point out that it might rely on any possible countermeasures.
According to the Organization for Economic Co-operation and Development’s most recent Economic Outlook report, which was released on Tuesday, the euro area is expected to grow by 1% in 2025 despite the transatlantic turmoil. Meanwhile, inflation in the euro area is expected to reach 2.2 percent this year, which is consistent with the March report.
Following the release of the latest inflation data, the yields on euro country bonds fell. The yield on the German 10-year bond fell more than two basis points to 2point 499 percent, while the yield on the French 10-year bond fell more than one basis point to 3point 169 percent.
In the meantime, the euro was down about 0.3 percent versus the US dollar.
