Headache for ECB as eurozone May inflation rises more than expected

The annual inflation rate across the eurozone is expected to be 2.6% in May, statistics body Eurostat said in a flash estimate, up from 2.4% in April and March, driven by rising prices in the services sector.

Economists had expected a smaller rise in inflation, to 2.5%, as investors expect an interest rate cut by the ECB next week.

Underlying inflation, which excludes volatile items such as food, energy, alcohol and tobacco came in at 2.9% from 2.7% in April.

Services inflation rose to 4.1% in May, up from 3.7% in April, while food, alcohol & tobacco inflation slowed to 2.6% from 2.8% in April.

"The rise in inflation can be ascribed to one-off factors and will not prevent a June rate cut, nor a continuation of disinflation. But higher core and services inflation will lead to the hawks on the ECB's governing council being more vocal," said Riccardo Marcelli Fabiani, senior economist at Oxford Economics.

"However, despite all the caveats services inflation jumping back to 4.1%, will be causing headaches for the European Central Bank."

"But this will not be enough to prevent the clearly-communicated June interest rate cut. Yet, the ECB will be cautious and is unlikely to lower interest rates at the July meeting, given the momentary interruption of disinflation - especially in services - and the strong wage data."

Reporting by Frank Prenesti for Sharecast.com