Inflation in Europe drops to lowest level since Russia invaded Ukraine

Inflation in Europe has fallen to its slowest pace since Russia invaded Ukraine, bolstering the case for the region’s central bank to bring interest rate hikes to an end soon. Consumer prices in the 20 countries that use the euro rose 6.1% last month compared with a year ago, easing from 7% in April, according to an initial estimate Thursday from the European Union’s statistics agency. That’s the lowest rate of inflation since February 2022, when Moscow launched a full-scale invasion of its neighbor, sending global energy prices soaring. The pace of food price rises eased for the second month running in May, while energy prices actually fell. Core inflation, which strips out food and energy, slowed to 5.3% — a four-month low. Inflation has fallen sharply in Germany, France, Italy and Spain, national data published Wednesday showed. Price rises eased across a broad range of product categories in Europe’s biggest economies. That could give the European Central Bank reason to pause interest rate hikes soon, although ECB President Christine Lagarde said 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 too long,” Lagarde said at a banking conference in Germany. The ECB, along with the US Federal Reserve and Bank of England, targets inflation of 2%. May’s inflation data will encourage those policymakers arguing that the ECB should end its tightening cycle, “but the hawks will no doubt point to the stickiness of services inflation and the tightness of the labour market,” Franziska Palmas, senior Europe economist at Capital Economics wrote in a note Thursday. Euro area unemployment dropped to 6.5% in April, from 6.6% the previous month, according to new EU data also published Thursday. Still, provided the gradual easing in core inflation continues, the ECB will likely settle for two more hikes, taking the deposit rate to a peak of 3.75%, Palmas added. Separate data published Tuesday showed lending by banks in the euro area stagnated further in April, with loans to households barely growing at all. “For the ECB, this provides more proof that its tightening policy is working and could give the doves a stronger argument to call for an end to rate hikes this summer,” said Bert Colijn, senior eurozone economist at ING. The ECB has increased interest rates by 375 basis points in less than a year — from minus 0.5% in July 2022 to 3.25% today.