Development and Causes
- Current Inflation Data:
- May 2025: Inflation at 1.9% (below ECB target)
- April 2025: Inflation at 2.2%
- Trend: The inflation rate has hovered around two percent since the beginning of the year. The decline in May was more substantial than expected; analysts had anticipated a rate of about two percent.
- Drove the Decline: Particularly noticeable is the sharp drop in service inflation: it fell in May to only three percent compared to four percent in April. One reason for this was the later timing of Easter this year, as well as a sharp decline in wage increases, which reduced cost pressure for companies, especially in labor-intensive sectors.
- Core Inflation (excluding energy, food, alcohol, and tobacco): This also fell significantly—from around three percent previously to now approximately two and a half to two and three-quarters percent, depending on the calculation method.
Significance for Investors and Monetary Policy
- ECB Interest Rate Decision: The upcoming interest rate decision by the ECB will be heavily influenced by this development. Markets currently anticipate another rate cut of at least a quarter percentage point—the probability for this is around ninety to ninety-five percent according to recent forecasts.
- Signal Effect for Markets: A further decline or stagnation of inflation near the target value could mean that the ECB, as the first major central bank after the pandemic-related price increases and the impacts of the Ukraine war, has permanently achieved its inflation targets. This would be an important signal for investors regarding future monetary policy actions and could lead to further easing in financial markets.
- Labor Market Development Despite Falling Inflation: Interestingly, despite the declining inflation rates, unemployment in the Eurozone remains very low—it was at a record low of only six point two percent in April.
Outlook
If inflation stabilizes near the target value or even remains below it permanently, further rate cuts are likely to be favored. At the same time, it remains to be seen how robust growth in Europe will be and whether new price shocks will occur.
For investors, this development means increased predictability of monetary policy decisions as well as potentially more favorable financing conditions in the capital market.