Société Générale economist Sam Cartwright notes Euro area headline inflation rose to 3.2% year-on-year in May, with core inflation at 2.5%. Services, not energy, led the increase, partly due to Easter timing effects. Relative to the ECB’s March projections, both headline and core are tracking slightly higher, reinforcing expectations for a June rate hike and a modest further rise in energy inflation ahead.

Services strength and energy outlook

"Euro area headline inflation rose by 0.2pp to 3.2% yoy (SGe: 3.2%) in May, matching the Bloomberg median estimate. Meanwhile, core inflation increased by 0.3pp to 2.5% yoy (SGe: 2.5%), 0.1pp above the Bloomberg median estimate, with the unrounded figure at 2.54% yoy."

"Relative to the ECB’s March forecast, headline inflation is tracking 0.1pp higher in 2Q26 at 3.2% yoy, while core inflation is 0.2pp higher at 2.4% yoy, supporting the case for a June rate hike by the ECB."

"Looking ahead, our baseline assumption is that the Strait of Hormuz reopens at the end of June. This could push Brent prices slightly higher in the near term, but most of the pass-through from Brent to fuel prices has already occurred."

"As a result, energy inflation is expected to rise only marginally over the coming months, as households renew their energy utility contracts at higher prices. On the other hand, if the EU allows governments to spend an additional 0.3% of GDP on energy-related support outside its fiscal framework, as news reports suggest, such measures could temporarily dampen headline inflation in the near term, before indirect effects begin to feed through later in the year."

"We expect indirect effects and supply chain disruptions in energy-related commodities to drive headline and core inflation to peaks of around 3.8% yoy and 2.8% yoy, respectively, in early 2027. This reflects our view that domestic demand, and therefore firms’ pricing power, is supported by German fiscal loosening, AI-related investment, a recovering housing sector, and the ongoing impact of NGEU funds."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)