Inflation hits 3.2% in the euro zone as Iran war pushes energy costs higher

The print was in line with forecasts in a Reuters poll of economists.

Energy costs represented the highest annual rate of inflation in May, according to the flash data, with prices rising by 10.9% — a slight rise from the euro zone’s 10.8% energy price growth recorded the previous month.

Services inflation rose to 3.5% from 3% in April, while food, alcohol and tobacco prices cooled to 2% from 2.4% the previous month.

Inflation rates also varied drastically between individual markets. Germany, Europe’s biggest economy, saw annual inflation fall to 2.7% in May from 2.9% in April. But Greece and Lithuania’s annual inflation rates rose above 5% last month. In France, annual inflation rose from 2.5% in April to 2.8% in May.

Tuesday’s print showed inflation in Europe is continuing to rise above the European Central Bank’s 2% target as oil and gas prices remain elevated in the wake of the U.S.-Iran war.

Inflation in the euro zone jumped to 3% in April, up from 2.6% in March. Prior to the outbreak of the conflict in Iran, inflation in the euro area had dipped below the 2% threshold.

Europe is particularly vulnerable to energy shocks as a major net energy importer.

Markets are currently pricing in a 94% chance of the ECB hiking its key interest rate by 25 basis points at its meeting later this month, according to LSEG data.

Following the data release, the euro was flat against the dollar at around $1.164. The yield on Germany’s 10-year bund, broadly seen as a benchmark for the euro zone, fell by 6 basis points.