EMU inflation picks up in May, led by a rebound in oil prices

Euro zone headline inflation picked up from ‐0.2 percent Y/Y to ‐0.1 percent Y/Y in May, led by a rebound in oil prices. Core inflation also picked up in May, in line with headline inflation, rising from 0.7percent Y/Y to 0.8 percent Y/Y. The downtrend in goods inflation slowed slightly in May from ‐1.1percent Y/Y to ‐1.0 percent Y/Y led by higher energy prices. Despite accelerating domestic demand, inflation in the services sector remains weak too showing no real signs of pick‐up for now.

However, market based measures of inflation expectations dropped significantly since the previous report. 10‐year inflation expectations, derived from swap markets, are just above 1 percent. The ECB’s preferred measure of inflation expectations, the 5yr/5yr forward, dropped to a new record low. The record low market expectations suggest that markets are losing faith in the ECB’s attempts to boost inflation.

"We expect euro zone headline inflation to pick up again soon, but any rebound will most likely be slow and very gradual. For now, it is unlikely that core inflation will reach again two percent in the medium term due to sluggish global growth and only moderate growth in the euro area," said KBC market research in a report.