Euro area’s headline inflation eased to 0.1 percent year-on-year in May. This was mainly because of the continued fall in energy prices. The deep recession in the currency bloc is dampening the underlying inflation. The core inflation rate remained at 0.9 percent for the second straight month, as compared with consensus expectations of 0.8 percent. Core rat had been at 1.2 percent in February. Several services such as package holidays, hotel accommodation or flights could not be brought. It is not certain whether and in which direction the core rate was distorted by this.
Nevertheless, there is much to imply that the underlying upward pressure on prices is actually softening, noted Commerzbank in a research report. The collapse of crude oil price alone is expected to depress the core rate by 0.1 to 0.2 percentage points. Meanwhile, price pressures from wages are also easing. Given the slump in employment, wages, particularly in the service sector, are not expected to rise over the course of the year.
The continued easing of the headline inflation rate is mainly because of the drastic decline in energy prices. Energy prices were down 12 percent year-on-year in May, while in January the rate of energy price rises was still 1.9 percent.
“However, at 0.1 percent the headline inflation rate should have largely bottomed out in May. In the second half of the year the price-damping effect of energy prices should fade and the inflation rate will probably rise again slightly”, added Commerzbank.
