Eurozone: Services inflation surge supports ECB hikes – ABN AMRO

ABN AMRO economists Bill Diviney and Rose Heaulme note that Eurozone headline inflation rose to 3.2% in May, with core inflation surprising at 2.5%. Energy remains the main driver, while food inflation eased. A sharp jump in services inflation, likely linked to transportation and airfares, is seen as narrowly focused but warrants monitoring. They still expect two ECB rate hikes by July.

Services-led upside surprise in May inflation

"Eurozone inflation picked up in line with expectations to 3.2% in May, from 3% in April, while core inflation surprised to the upside, rising to 2.5% (ABN/consensus: 2.4%) from 2.2%."

"The big upward surprise this month came from services inflation, which jumped 0.5pp to 3.5% in May – we had expected a smaller rise to 3.3%."

"As usual with the flash estimate, we don’t have the full breakdown of services inflation at this point, but piecing together clues from the individual country press releases suggests that it was mostly driven by transportation services, and within that – we suspect – airfares, given the outsized rise in jet fuel since the Iran conflict broke out (which at its peak rose at double the magnitude of Brent crude)."

"In any case, if the rise in services inflation is as narrowly focused as we suspect, it is not necessarily a concern at this point, but it bears close watching."

"Looking ahead, we expect inflation to remain well above the ECB’s 2% target for the remainder of this year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)