Cooling Eurozone Inflation Paves Way for ECB Rate Cut

Eurozone inflation dipped below the European Central Bank’s 2% target for the first time since September 2024, coming in at 1.9% in May. 

The sharper-than-expected slowdown, down from 2.2% in April, has boosted market expectations of a 25 basis point rate cut when the ECB meets this Thursday. 

Core inflation also eased, falling to 2.4% from 2.7%, with monthly price growth nearly flat at 0.1%, a confirmation of broad disinflationary momentum.

The cooling trend was most clear in services, where inflation fell from 4.0% to 3.2%, while non-energy industrial goods posted a stable 0.6% rise. 

Energy prices dropped 3.6% year-on-year, continuing their downward trend. Food, alcohol, and tobacco remained inflationary outliers, rising 3.3% annually, up from 3.0%. The data highlights diverging pressures within the bloc, with France registering the lowest inflation rate at 0.6%, while Estonia topped the chart at 4.6%.

Meanwhile, the euro area’s unemployment rate declined to 6.2%, down from 6.3% in March, suggesting a resilient labor market despite fading inflation.

What Does This Mean for Me?

The euro weakened against the dollar, sliding to $1.1400 as traders moved to fully price in a rate cut that would lower the ECB deposit facility rate to 2.0%, its lowest since January 2023. German two-year bond yields, closely tied to ECB policy shifts, fell to 1.77% as bond markets responded to the expected easing.