The Inflation in the euro zone decreased below the objective of European Central Bank (ECB) last month due to surprisingly benign services costs, which supports the expectations of greater flexibility of monetary policy, although global commercial tensions promote longer -term inflationary pressures.
Consumer prices inflation in the 20 countries that share the euro slowed 1.9% in May from 2.2% in April, below the expectations of 2.0%, due to a drop in energy prices and a strong decrease in inflation in services.
A more followed reading about underlying inflation, that is, prices excluding volatile fuel and food prices, also slowed 2.3% from 2.7%, driven by a deceleration in the growth of services prices to 3.2% from 4.0%, according to Eurostat, the EU statistical agency.
The ECB has cut interest rates seven times since last June and another movement this Thursday is almost completely discounted, given the moderate salary increases, the fall in energy prices, a strong euro and warm economic growth, factors that all point to an inflation in descent.
“Given the clear uninflationary panorama, especially in the services, that the ECB drops the rates this Thursday seems a safe bet, and more flexibility should be expected later in the year,” said Riccardo Marcelli Fabiani of Oxford Economics.
Inflationary pressures are so weak that some economists even expect inflation to continue falling below the objective of the ECB of 2% this year and that it does not rebound until some time of 2026.
“A strong fall in the underlying inflation in May to 2.3% and from general inflation to 1.9% is a clear sign that continuing below the inflationary objective remains a possibility for the ECB,” said Bert Colejn, an Ing economist.
Opposite trends
This generates a dilemma for the ECB because the short and long term perspectives for prices are very different, since inflation could be undergoing rise by a series of factors in the future.
Therefore, investors believe that the ECB will pause in feat cuts after reducing them to 2% in June and would only make one more cut this year, possibly in autumn. However, they also see a probability of approximately 30% of an additional cut, which would carry the 1.5% deposit rate.
Interest rates are also firmly in “neutral” territory now, where they neither slow economic growth nor stimulate it, which for some is an argument to take a respite and observe how US trade erratic political policy will impact growth and prices.
The defenders of a stricter policy have also warned that inflation could soon rise, given the unusually high level of geopolitical tensions.
A commercial war, the increase in tariffs, dellobicization and realignment of corporate value chains are expected to increase prices.
In addition, the continuous fall of the population of working age and investments related to defense and climate change could also increase inflationary pressures.
How these opposite trends will impact the ECB’s policy is not yet clear, but the ECB usually looks beyond short -term price volatility, since it points to inflation in the medium term, a flexible concept that normally refers to one or two years forward.
However, those responsible for monetary policy could be forced to intervene if they believe that a price drop is also dragging or “disagreeing” long -term inflationary expectations.
Source: Ambito
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