Services drives May eurozone inflation rise
Eurozone inflation picked up in line with expectations to 3.2% in May, from 3% in April, while core inflation surprised to the upside, rising to 2.5% (ABN/consensus: 2.4%) from 2.2%. Energy continues to be the biggest driver of inflation, but held steady in May at 10.9% y/y, as a rise in petrol prices was probably offset to a greater extent than expected by falling diesel prices. Indeed, as we pointed out in our latest Global Monthly, the gap between diesel and petrol – which widened as refineries struggled to replace lost Middle Eastern diesel supply – has now largely normalised as European refineries filled the gap. Food inflation also unexpectedly fell back, to 2% from 2.4% in April, though there was considerable variation across countries this month (for instance, France saw a big rise in food inflation).
Rose Heaulme
Research Intern
The big upward surprise this month came from services inflation, which jumped 0.5pp to 3.5% in May – we had expected a smaller rise to 3.3%. As usual with the flash estimate, we don’t have the full breakdown of services inflation at this point, but piecing together clues from the individual country press releases suggests that it was mostly driven by transportation services, and within that – we suspect – airfares, given the outsized rise in jet fuel since the Iran conflict broke out (which at its peak rose at double the magnitude of Brent crude). It could also be that Pentecost and Ascension day holidays both falling in May this year (in contrast to last year) had a compounding upward effect on airfares. In any case, if the rise in services inflation is as narrowly focused as we suspect, it is not necessarily a concern at this point, but it bears close watching.
ECB still on course for summer rate hikes
Looking ahead, we expect inflation to remain well above the ECB’s 2% target for the remainder of this year. Even with a near-term reopening of Hormuz, energy supply-demand dynamics will remain tight, keeping energy prices well above pre-war levels. However, there has been a welcome cooling in some of the most heavily impacted downstream products such as jet fuel as well fertiliser, which should take some of the edge off of the inflation shock. Still, with longer term (3y ahead) inflation expectations also remaining elevated according to yesterday’s release, at 2.9%, we continue to think the ECB will hike rates twice at the June and July meetings, taking the deposit rate to 2.50%. (Bill Diviney & Rose Heaulme)
Energy and services push Dutch inflation higher
In May, Dutch inflation (CPI) rose sharply to 3.5% y/y, up from 2.8% in April. The main driver was the increase in energy prices, as a result of the conflict in the Middle East. So far, this has mainly been visible in higher fuel prices. Gradually, it will also feed through into households’ energy bills, although for the time being this effect is still being dampened by the fact that 55% of households had a fixed energy contract in April. In addition, higher energy prices typically spill over into the prices of other goods and services. We are now also seeing this in industrial output prices, pointing to a broadening of price pressures.
Services also made a contribution to inflation in May. A more detailed breakdown is not yet available, but this may be related to higher prices for holiday-related services, such as airline tickets and accommodation. In addition, May this year included more national holidays than in the same month last year, which may have temporarily added upward pressure to services prices. The prices of consumption abroad, for example during holidays, also increased.
For the Netherlands, this new energy price shock comes at an unfavourable moment, as the economy has barely recovered from the previous inflation shock. As a result, the risk of second-round effects via wages and prices is greater than in many neighbouring countries. We therefore expect wage growth to remain elevated for longer, causing the earlier decline in services inflation to stall for the time being. (Aggie van Huisseling, Jan-Paul van de Kerke)