Inflation across the euro area accelerated to 3.2% in May, its highest level since 2023, strengthening expectations that the European Central Bank is preparing to raise interest rates at its upcoming policy meeting.
Fresh data released by Eurostat showed that consumer prices rose from 3.0% in April, in line with economists’ forecasts. The increase was driven primarily by energy costs and a sharp uptick in services inflation, both of which are now feeding broader concerns about persistent price pressures across the single currency bloc.
Energy prices remained the most significant contributor, rising 10.9% year-on-year in May, only slightly higher than April’s 10.8%. The sustained increase reflects ongoing disruptions in global supply chains linked to geopolitical tensions in the Strait of Hormuz, which has tightened global oil flows and pushed up costs for European consumers and businesses.
More concerning for policymakers in Frankfurt was the acceleration in services inflation, which climbed to 3.5% from 3.0%. Economists view this category as a key indicator of underlying domestic price pressure, suggesting that external energy shocks are beginning to spill into wages and broader economic activity.
Core inflation, which strips out volatile energy and food prices, also edged higher to 2.4% from 2.2%, reinforcing the view that price pressures remain embedded in the eurozone economy.
Inflation trends varied across member states. Spain recorded the highest rate among major economies at 3.6%, followed by Italy at 3.3%, where inflation has picked up sharply. Germany stood at 2.7% and France at 2.8%, while Portugal was among the few countries to see a slight easing, down to 3.1%.
At the same time, survey data from the European Central Bank indicated that households expect inflation to remain elevated. Consumers’ 12-month expectations held at 4.0%, while perceptions of past inflation rose to the same level, highlighting continued public concern about the cost of living. Longer-term expectations remained more stable but still above the ECB’s target.
Financial markets are now pricing in a near-certain rate hike next week. Betting markets assign a 97% probability to a 25-basis-point increase in the ECB deposit rate, with several major banks also forecasting further tightening into the summer.
Economists argue the ECB is moving toward what some describe as an “insurance hike” to prevent inflation expectations from becoming unanchored. However, there is growing debate over how long policy tightening can continue without harming already fragile economic growth.
Higher borrowing costs risk further weighing on household spending, business investment and heavily indebted governments across the bloc. Some analysts expect one or two additional rate increases, while others warn that weaker economic data could force an earlier pause.
Currency markets remain cautious, with the euro failing to fully reflect the scale of energy price declines due to weak business sentiment.
As policymakers prepare for next week’s meeting, the central question is whether the current inflation surge proves temporary or signals a more persistent shift that will require prolonged monetary restraint.
