Euro zone inflation beats expectations in May

Inflation in the euro zone was higher than expected in May, data on Tuesday showed, in a sign that price pressures are returning to a recovering economy.

Consumer prices in the 19-member euro zone rose 0.3 percent last month from a year earlier, after a flat reading in April, statistics office Eurostat said.

The number was higher than the 0.2 percent rise forecast by analysts, giving the euro a boost. The single currency was last trading at $1.0970, up 0.4 percent on the day.


Krisztian Bocsi | Bloomberg | Getty Images

The inflation data is likely to come as welcome news for the European Central Bank, which embarked on a 1 trillion euro ($1.09 trillion) monetary stimulus program earlier this year to boost prices and economic growth in the region.

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At the same time, the better-than-expected numbers could put pressure on the central bank to unwind the program, analysts said.

"The data is really a double edge sword for the policy makers because on one hand, they are happy that inflation has picked up," Naeem Aslam, chief market analyst at AvaTrade, said in a note.

"But then on the other hand, the Bundesbank has more excuse to increase the noise that the purpose of the ECB's QE (quantitative easing) staying intact for a much longer time is not a good idea at all – not to mention, that they were not in very much of favor of having this in the first place," he added, referring to Germany's central bank.

The breakdown of the inflation numbers showed that core inflation - which strips out energy and food prices – rose 0.9 percent last month, up from 0.7 percent in April. That's still well below the ECB's medium-term target of inflation close to 2 percent.

Other data released at the same time showed prices at the factory gate fell 0.1 in April from a month earlier against market expectations for a 0.1 percent rise.

Euro zone May manufacturing PMI: Reaction
Euro zone May manufacturing PMI: Reaction   

"May's rise in euro-zone inflation will offer some relief to the ECB, but with underlying price pressures still very subdued, strong monetary policy support will be needed for the foreseeable future," Jennifer McKeown, senior European economist at Capital Economics, said in a note.

The inflation data comes ahead of the ECB's monthly meeting on Wednesday.

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Looking ahead, McKeown warned: "Given the continued high rate of unemployment and signs that the recovery is already losing steam, the threat of deflation has not evaporated."

She added that the ECB was likely to reiterate that it will implement its bond-buying program in full, "and we think that more may ultimately be needed."

Unemployment in the euro zone currently remains relatively high at 11.30 percent. And while manufacturing data has showed signs of a pick up in activity from some countries, the numbers from big economies such as Germany have disappointed.

Data on Monday for instance, showed Germany's manufacturing purchasing managers' index fell to 51.1 in May from 51.4 the month before.