UBS Economics-European Economic Comment _Eurozone May inflation disappoin...-108466919.pdf

ab31May2024GlobalResearchandEvidenceLabEuropeanEconomicCommentEurozone:MayinflationdisappointsHeadlineandcoreup0.2ppeachto2.6%and2.9%,worsethanexpectedMayflashEurozoneinflationrose0.2ppto2.6%y/y,exceedingexpectationsofasmallerincrease(UBSeandconsensus:2.5%y/y).Atthecomponentlevel,coreinflationincreasedmorethanexpected(+0.2ppto2.9%y/y,UBSeandconsensus:2.7%y/y).Withincore,goodsinflationeased0.1ppto0.8%y/y,betterthanourexpectationsofstabilisation.Incontrast,servicesinflationdisappointed,risingmorethanexpected+0.4ppto4.1%y/y(UBSe:3.8%),largelyexplainingtheupsidesurpriseinbothheadlineandcorevsourexpectations.However,thelimitedbreakdownavailablewiththeflashestimatemakesitdifficulttogaugehowmuchoftheincreaseinserviceswasduetovolatile/seasonaltravel-relatedcomponents,whichweexpectedtobethemaindriveroftheincreaseinservicesinMay,andhowmuchcamefrommorelabourintensiveservices.Inthiscontext,thefinalestimatetobereleasedon18Junewillbeimportant.Outsideofcore,asexpected,positivebaseeffectspushedenergyinflationup0.9ppto+0.3%y/y(UBSe:0.5%y/y).Incontrast,foodinflationcontinuedeasedby0.2ppto2.6%y/y(UBSe:2.7%y/y).Thechangeinthesequentialrun-ratesonbalancedisappointed,withapickupinservices(+0.3ppto0.5%m/mswda)andstabilityingoods(at0%m/mswda).Asaresult,theannualised3m/3mraterateofseasonallyadjustedservicesinflationrose0.1ppto5.3%(Figures8and9).Lookingahead,weexpectheadlineinflationtodecline0.2ppto2.4%y/yinJunewithcoreinflationeasing0.2ppto2.7%y/y.Overall,weforecastheadlineinflationaveraging2.4%thisyearand2.1%in2025.Countrydetail:marginalupsidesurprisesacrosstheboardInGermany(out29May),headlineinflationrose0.4ppto2.8%y/y,slightlystrongerthanexpected(UBSeandconsensus:2.7%).Wecalculatethattheincreaseinheadlineinflationwaslargelydrivenbyhighercoreinflation(+0.5ppto3.4%y/y),whichmorethanoffsetthedeclineinfoodinflation,whileenergyinflationwasbroadlyunchanged.Comparedtoourexpectations,themainupsidesurprisecamefromastronger-than-expectedincreaseinpackageholidayprices.InFrance(outtoday),inflationalsosurprisedtotheupside,rising0.3ppto2.7%y/y(UBSe:2.5%;consensus:2.6%).Comparedtoourexpectations,theupsidesurpriseappearstohavecomelargelyfromstronger-than-expectedcoreinflation(servicesinparticular).InItaly(outtoday),Mayinflationdeclined0.1ppto0.8%y/y,slightlylessthanexpected(UBSeandconsensus:0.7%y/y)withtheupsidesurpriserelativetoourexpectationsalsolargelyduetostronger-than-expectedservicesinflation.InSpain(out30May),inflationrose0.4ppto3.8%y/y,inlinewithourforecast(consensus:3.7%).IntheNetherlands(outtoday),inflationwasup0.1ppto2.7%y/y,inlinewithourexpectations(consensus:2.5%y/y).ECB:FirstcutinJune;subsequentpacemoreuncertainThesignalsfromtheECBhavebeenclear-itisontracktocutratesby25bpsto3.75%intheupcomingmeetingon6June.Wethinkeventoday"sdisappointinginflationdataandthetick-upinthelatestECBnegotiatedwagegrowthrelease(4.7%y/yinQ1-24upfrom4.5%y/yinQ4-23)willnotstoptheECB.However,thepaceofsubsequentratecutsappearsmuchlessclear-i.e.moredata-dependent.Afterall,thereismajoruncertaintyovert