Euro Zone Inflation Rises to 3.2% in May, ECB Rate Hike Expected

Euro zone inflation increased to 3.2% in May, up from 3% in April, marking the highest annual rate since September 2023. This bolsters the case for the European Central Bank (ECB) to raise interest rates for the first time in nearly three years to contain price pressures, partly due to the Middle East conflict. Ireland's inflation rate was estimated at 3.5% for May.

Energy prices rose 10.9% year-on-year, a slight increase from April's 10.8%. This is the third consecutive month that price growth in the 21-country bloc has exceeded the ECB's medium-term target of 2%. Core inflation, excluding food and energy, increased by 0.3 percentage points to 2.5%, higher than analysts' 2.4% expectation and the highest in over a year. Services inflation jumped from 3% in April to 3.5%, remaining above the ECB's 2% target for over three years.

Top European policymakers, including ECB chief economist Philip Lane and executive board member Isabel Schnabel, have indicated a likely rate hike this month due to high oil prices fueling wider inflation. Traders continue to price a 95% probability of the ECB raising borrowing costs by a quarter point to 2.25% this month. The euro saw little change, up 0.1% against the dollar at $1.164.