Inflation

In Europe, inflation has slowed to its smallest rate since Russia invaded Ukraine, supporting the case for the region's central bank to cease interest rate rises soon.

According to an initial estimate Thursday from the European Union's statistics office, consumer prices in the 20 eurozone countries grew 6.1% last month compared to a year earlier, down from 7% in April.

This is the lowest inflation rate since February 2022, when Moscow launched a full-scale invasion of its neighbor, driving global oil costs skyrocketing.

Food price increases slowed for the second month in a row in May, while energy costs declined. Core inflation, which excludes food and energy, fell to 5.3%, a four-month low.

Inflation has declined dramatically in Germany, France, Italy, and Spain, according to national figures released on Wednesday. Price increases in Europe's largest economies have slowed across a wide range of product categories.

This might offer the European Central Bank cause to suspend rate rises soon; however, ECB President Christine Lagarde stated on Thursday that policymakers still had "ground to cover to bring interest rates to sufficiently restrictive levels."

"Today, inflation is too high, and it is set to remain so for far too long," Lagarde warned at a banking conference in Germany.

The ECB, like the US Federal Reserve and the Bank of England, aims for 2% inflation.

Britain is so eager to control inflation that it is considering food price controls.

May's inflation data will strengthen the case for the ECB to end its tightening cycle, but "hawks will no doubt point to the stickiness of service inflation and the tightness of the labor market," Capital Economics senior Europe economist Franziska Palmas wrote in a note Thursday.

According to fresh EU figures released Thursday, eurozone unemployment fell to 6.5% in April, down from 6.6% the previous month.

Nonetheless, if core inflation continues to fall gradually, the ECB is likely to settle for two more rises, raising the deposit rate to 3.75%, according to Palmas.

Separate statistics released on Tuesday revealed that eurozone bank lending remained stagnant in April, with loans to consumers scarcely expanding at all.

"This provides more evidence that the ECB's tightening policy is working and may give the doves a stronger argument to call for an end to rate hikes this summer," said Bert Colijn, senior eurozone economist at ING.

In less than a year, the ECB has raised interest rates by 375 basis points, from minus 0.5% in July 2022 to 3.25% today.

Spanish inflation decreased faster than expected, lending credence to European Central Bank officials who claim the continent's unprecedented price surge is receding and interest-rate hikes will be phased out shortly. May's reading decreased to 2.9%, the lowest since July 2021, as gasoline prices plummeted and food price inflation slowed. The figure followed an increase to 3.8% in April and is far lower than the 3.3% consensus prediction in a Bloomberg survey of analysts. Underlying inflation, which excludes the expenses of energy and some food goods, declined for the third month in a row, although it remained excessive at 6.1%. Following the release of the report, government bonds gained, and the euro fell 0.3% to a two-month low of $1.0673. Traders reduced their expectations for future rate hikes but are still pricing in another half-point increase this year.

The numbers released on Tuesday are the first in a series of consumer-price disclosures from the area. France, Italy, and Germany report on Wednesday, before the eurozone's 20 member countries release their own figures the following day. While Spain has recently claimed by far the weakest inflation rate among the eurozone's main economies, it is exhibiting the same trend: a faster decline in headline price hikes than in core price gains.

With ECB policymakers mostly looking to the latter to determine when to end their extraordinary monetary-tightening campaign, analysts and investors anticipate at least two more quarter-point rate hikes. Some officials believe rises will continue through September, perhaps raising the deposit rate to 4% from 3.25% presently in order to return inflation to the 2% target.

"We believe we still have some way to go in tightening monetary policy, but we also believe we are getting closer to the end," said Spanish Central Bank Governor Pablo Hernandez de Cos on Monday. The slowing of inflation in May will be welcomed by Spanish Prime Minister Pedro Sanchez. After his left-wing coalition suffered huge losses in Sunday's municipal elections, he announced an unexpected snap election on July 23.