Preliminary national readings for May show inflation in the euro zone's four largest economies stayed above the European Central Bank's 2% target for a third straight month, official data released on Friday indicated. The tentative figures suggest that rising fuel prices - a consequence of the conflict in Iran - are beginning to ripple out beyond petrol stations and into other parts of the consumer price basket.
France and Italy recorded increases in headline inflation in May, while Spain's rate remained unchanged and most of the German states that have reported so far posted declines. France's national gauge rose to 2.8% from 2.5% the prior month. Italy's reading climbed to 3.2% from 2.7%. Spain's headline rate was stable at 3.2%. Several of Germany's key economic states, including Bavaria and Baden-Wuerttemberg, reported falling inflation for the month.
Observers point to fuel as the trigger for the widening impact. Both Spain and Italy registered strong increases in prices for transport and for entertainment activities - categories that typically feel the knock-on effects of higher petrol and diesel costs. In France, fresh food prices jumped sharply, with a 4.1% rise, while services inflation edged up slightly.
Germany implemented a temporary fuel discount for May and June as part of measures aimed at limiting the immediate burden of higher petrol prices on consumers. Despite this intervention, national-level data from Germany so far show softer inflation trajectories in a number of the country's largest states.
Market attention is focused on euro area-wide statistics due on Tuesday, with consensus expectations pointing to headline inflation of 3.3% for May and a core measure that excludes energy, food, alcohol and tobacco at 2.4%.
Measures of underlying inflation rose in a number of member states. Italy's underlying gauge increased to 1.8% from 1.6%, while Spain's underlying rate ticked up to 2.9% from 2.8%.
Economic forecasters signalled that the early returns from national reports hint at upward pressure on both headline and core inflation. "This information so far hints at a further rise in headline inflation, and some increase in core inflation," said JPMorgan economist Raphael Brun-Aguerre in a note.
Expectations about the near-term path of inflation remain linked to developments in the Middle East. "We are not at the peak yet," said Nadia Gharbi, a senior economist at Pictet Wealth Management, adding that she expects euro zone inflation to rise through August. Gharbi noted that much will depend on the situation in the Middle East and said the baseline assumption is for conditions to normalise by the end of June.
Oil markets have been volatile since the outbreak of the conflict, with hopes of a deal curbing hostilities pushing crude prices sharply lower from late-April peaks. A barrel of Brent crude was trading around $92 in recent sessions, down from about $118 during the April highs, but still well above roughly $70 a barrel seen just before the conflict began.
At the same time, France continued to experience deflation in manufacturing prices, a pattern that has led some economists to argue that the current inflation shock could be smaller in scope than the surge that followed the COVID pandemic and Russia's invasion of Ukraine in 2022. That view was expressed by Bersingeco economist Sylvain Bersinger, who pointed to the manufacturing price dynamics as reinforcing that perspective.
Policy implications are already under consideration. The persistence of inflation above the ECB's 2% reference level in major member economies is likely to weigh on the central bank's deliberations and could support the case for a policy rate increase at the next meeting.
Data snapshot:
- France: headline inflation 2.8% (from 2.5%); fresh food +4.1%.
- Italy: headline inflation 3.2% (from 2.7%); underlying inflation 1.8% (from 1.6%).
- Spain: headline inflation stable at 3.2%; underlying inflation 2.9% (from 2.8%); strong rises in transport and entertainment prices.
- Germany: most reporting states showed declines in May; Bavaria and Baden-Wuerttemberg among those with falling rates; national measures include a fuel discount for May and June.
- Euro area consensus (due Tuesday): headline inflation expected at 3.3% in May; core inflation expected at 2.4%.
- Oil: Brent around $92 per barrel versus $118 at late-April peak and about $70 before the conflict.