Eurozone Inflation Rises in Fresh Signal for ECB Caution

• Eurozone inflation rose in May, data showed on Friday, in a sign the European Central Bank still faces a slow and uncertain journey to reach its goal of fully reining in prices. The bigger-than-expected increase in inflation is unlikely to stop the ECB from lowering borrowing costs from a record high next week but may cement the case for a pause in July and a slower pace of interest rate reductions in the coming months.
• Consumer prices in the 20 countries that share the euro rose by 2.6% year-on-year in May, inching away from the ECB's 2.0% target after increases of 2.4% in the previous two months, according to Eurostat's flash estimate. Economists polled by Reuters had anticipated inflation would rise to 2.5%, fuelled in part by an unfavourable comparison to last year when Germany had subsidised rail travel, among other one-off factors.
• ECB policymaker Fabio Panetta, the governor of the Bank of Italy, said the latest reading was neither good nor bad as he reaffirmed his view that the central bank could cut rates several times. More significantly, a closely watched measure of underlying inflation that excludes food, energy, alcohol and tobacco came in at 2.9% from 2.7% in April.
• Prices in the services sector, which some policymakers have singled out as especially relevant because they reflect domestic demand, rebounded to 4.1% from 3.7%. This was likely to mirror larger-than-expected wage increases in the first quarter of the year, which have boosted consumers' battered disposable income after years of below-inflation pay hikes.
• Markets are currently pricing around 57 basis points of ECB rate cuts in 2024, indicating a 25-basis point cut in June, and one more by year-end.

(Source: Reuters)