Euro area May flash HICP: Headline inflation back below 2%, with falling services inflation

Euro area headline flash inflation fell to 1.9% Y/Y in May, dropping below 2% for the first time since September 2024. Core inflation also decreased, to 2.3% from 2.7% (lowest level since January 2022) , driven by a reduction in services inflation , which fell to 3.2% Y/Y from 4.0% in April—its lowest level since March 2022. This sharp decline suggests that the April increase was a temporary bump, largely influenced by volatile package holiday prices. A wide array of indicators (including the ECB wage tracker and negotiated wages) points to renewed disinflation in the services sector in the coming months. Inflation for non-energy industrial goods remained unchanged at +0.6% for the fourth consecutive month, while energy inflation remained stable at -3.5%. ► Germany : Harmonized inflation slowed down to 2.1% Y/Y in May, down from 2.2% in April, slightly exceeding consensus expectations. Looking at the sub-components, services inflation decreased strongly from 3.9% Y/Y to 3.4%, while inflation in goods increased this month to 0.9% , up from 0.5%. Finally, the energy component continues to have a negative contribution. Despite opposing contributions from the components of goods and services, core inflation edged down slightly in May to 2.8% Y/Y after 2.9% in April. ► France : May inflation, as measured by the HICP , stood at 0. 6 % Y/Y, down from 0.9% in April , marking its lowest level in four years and the lowest print within the euro area. Services inflation significantly decreased to 2.1%, down from 2.4% in April, with a notable decline observed in transportation and communication service prices. Assuming overall stable oil prices, we anticipate that French inflation will remain below 1% until the end of the year (except for September) and will average 0.8% in 2025. ► Italy : In May, inflation decelerated to 1.9% from 2% previously, while core inflation declined to 1.9% from 2.2%. Services prices accounted for most of the decrease. Following a sharp rise in service prices in April, which reached 3.4% Y/Y compared to 2.8% in March, they decelerated to 2.9% in May. Additionally, energy prices fell from -0.7% Y/Y in April to -1.8% in May. In the coming months, we foresee inflation remaining around 1.9% until December 2025. ► Spain : According to preliminary estimates, inflation has declined to 1.9% in May from 2.2% in April. A lthough no detailed breakdown is available at this stage , the statistical office indicated that the deceleration is primarily due to the slowdown in entertainment and leisure inflation after significant increases in April. Core inflation reached 2.1% in May, down from 2.5% in April. We anticipate a new 25 bps ECB rate cut on 5th June and the fall in services inflation paves the way for a potential dovish bias during C. Lagarde’s press conference . Beyond June, we expect two additional rate cuts and a terminal rate at 1.5% (see ECB Preview ).