Inflation in the eurozone slowed to 1.9% in May, dropping below the European Central Bank’s (ECB) 2% target for the first time in months. This decline was driven by lower energy prices and a sharp slowdown in services inflation, which fell to 3.2% from 4.0%.
Core inflation, which excludes volatile food and fuel costs, also eased to 2.3% from 2.7%, according to Eurostat data released Tuesday.
The ECB has cut interest rates seven times since last June to combat weak inflation and is expected to reduce rates again this week. Factors such as muted wage growth, a strong euro, and slow economic expansion continue to ease price pressures.
Some economists now predict inflation could remain below 2% throughout 2025 and may not rebound until 2026.
However, the ECB faces a complex challenge. While short-term inflation is weak, longer-term risks remain. Rising geopolitical tensions, trade disputes, tariffs, and shifts in global supply chains could push prices higher in the future.
Additionally, demographic trends and increased spending on defense and climate initiatives may add inflationary pressures.
Market expectations suggest the ECB will pause rate cuts after June, possibly making only one more cut later this year. Interest rates have reached a neutral level, neither stimulating nor slowing growth, prompting some policymakers to adopt a cautious approach amid global uncertainties.
The ECB typically focuses on medium-term inflation, roughly one to two years ahead, and may overlook short-term fluctuations. Yet if low prices begin to undermine long-term inflation expectations, the bank could intervene to stabilize the outlook.
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