Bloomberg Economics: Upward Revision of Core Inflation in the Eurozone Strengthens the Case for a Central Bank Rate Hike in September

Although these more volatile projects are less able to reflect underlying cost pressures, hawks within the European Central Bank may argue that the upward revision of core inflation further proves that the inflationary impact triggered by the energy shock is spreading. Bloomberg Economics still expects the ECB to implement the last rate hike of this cycle in September, and this data provides further support for that expected action. However, if the strong rise in tourism service prices is only temporary, and the retreat in commodity prices triggered by the news of the US-Iran agreement persists, our forecast for the interest rate path will face downside risks. The revised May inflation data confirms that the overall inflation rate in the month accelerated to 3.2%, up from 3.0% in April. The increase was mainly driven by tourism service prices—airfares and package tour prices in the month each contributed an additional 0.1 percentage points. In contrast, the core inflation rate was revised up from an initial value of 2.5% to 2.6%, with an increase from April’s 2.2%. Given that this indicator covers a relatively narrow basket of goods and services, the impact of airfares and package tours is particularly significant. Looking ahead, Bloomberg Economics expects the impact of the energy shock on core inflation will be moderate, as second-round effects remain limited. We forecast that the average monthly core inflation rate for the third quarter of 2026 will drop to 2.0% from 2.2% in the second quarter of 2026. The overall inflation rate may also slow due to falling commodity prices. ECB economists believe the impact of the energy shock on inflation is broader than we expect. Even under its “milder scenario,” the core inflation rate will reach a peak of 2.6% from the fourth quarter of 2026 to the first quarter of 2027 and remain at 2.1% at the end of the forecast period—still slightly above the 2% target. In this scenario, the overall inflation rate will peak at 3.2% in the second to third quarters of 2026 and will not fall below the 2% target until the second quarter of 2027, when base effects will drive the overall inflation rate down to 1.6%. Currently, oil prices are about $10 per barrel lower than assumed in this scenario, so the risks to these headline inflation forecasts are skewed to the downside. Natural gas prices are basically consistent with the assumptions in this scenario.