Top euro zone countries see Iran inflation fallout broaden in May

• Transport and entertainment costs rose sharply in Spain and Italy as higher fuel prices created knock-on effects across the economy
• Economists expect euro zone-wide inflation to reach 3.3% in May and continue rising until August, depending on Middle East developments
• Oil prices have fallen from $118 per barrel in late April to $92, but remain well above pre-war levels of around $70, with underlying inflation measures rising in Italy and Spain

Summary

Inflation in the eurozone's four largest economies remained above the European Central Bank's 2% target for the third consecutive month in May, driven by rising fuel costs from an Iran-related conflict spreading to broader price categories.

Key Figures

France: Inflation rose to 2.8% from 2.5%, with fresh food prices jumping 4.1% and services inflation increasing slightly.

Italy: Inflation climbed to 3.2% from 2.7%, with core inflation rising to 1.8% from 1.6%. Transport and entertainment costs showed strong increases.

Spain: Inflation held steady at 3.2%, though core inflation edged up to 2.9% from 2.8%. Transport and entertainment sectors saw significant price jumps.

Germany: Inflation fell in major states including Bavaria and Baden-Wuerttemberg, attributed to a temporary fuel discount implemented for May-June.

Market Implications

The data strengthens the case for an ECB rate hike in June and raises concerns about persistent inflation becoming entrenched in the eurozone. Eurozone-wide headline inflation is expected at 3.3% for May, with core inflation at 2.4%.

Oil prices have declined from $118 per barrel in late April to $92 following hopes for a U.S.-Iran ceasefire deal, though prices remain significantly above pre-conflict levels of around $70. Economists predict inflation will peak around August, dependent on Middle East stability, with expectations for normalization by end of June.

Analysts note this inflation shock appears smaller than the post-COVID/Ukraine invasion surge of 2022, with France showing continued manufacturing price deflation.