Eurozone inflation eases to 1.4% in May

Inflation was 1.4% in May, down from 1.9% in April, slightly lower than consensus expectations for 1.5% and marking the lowest rate so far this year. Meanwhile, core inflation - which excludes energy and food - came in at 0.9%, down from 1.2% in April and lower than consensus of 1.0%.

Capital Economics said the drop to 1.4% was largely due to the unwinding of Easter timing effects that pushed inflation in April. "Admittedly, the core inflation rate fell from 1.2% to 0.9% – the same as before the Easter distortions. On the face of it, this suggests that underlying inflation is subdued," said European economist Jack Allen.

"However, the strength of recent activity indicators suggest that core inflation may pick up. Other data released this morning revealed that the euro-zone unemployment rate fell from a downwardly-revised 9.4% in March to 9.3% in April. On past form, this is broadly consistent with annual wage growth rising from 1.6% in Q1 to 2% or more. So the ECB is likely to feel increasingly confident that the economic recovery will continue and core inflation will pick up gradually.

"As a result, at next week’s meeting we expect the Bank to drop the references to interest rate cuts and expanding QE from its forward guidance."

David Morrison, senior market strategist at SpreadCo, said the key takeaway with the inflation numbers is that they support ECB President Mario Draghi’s assertion that inflation remains subdued and that “substantial” stimulus is still required.

"This has put a dampener on recent speculation that the ECB is getting ready to taper its bond purchase programme, let alone join the US Federal Reserve in tightening monetary policy. It may be that economic growth is picking up across the currency bloc. But while inflation remains so far below target, the current monthly bond purchases look set to continue, and could even be extended beyond the year-end cut-off date."

Berenberg said: "The data suggest no need for the ECB to raise its refinancing rate before 2019. In the meantime, the Governing Council will feel comfortable enough to turn more neutral in its risk assessment at its meeting next week, announce tapering in September and reduce the current amount of monthly stimulus of €60 bn from January 2018 onwards."