Euro zone inflation rose to an estimated 3.2% in May, driven by double-digit energy price growth, according to official data released Tuesday.
The figure climbed from 3% in April and came in line with forecasts in a Reuters poll of economists, landing well above the European Central Bank’s 2% target.
Energy costs represented the highest annual rate of inflation in May, with prices rising by 10.9% year-on-year, a slight increase from the 10.8% 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 varied significantly between individual markets, with Germany seeing annual inflation fall to 2.7% in May from 2.9% in April.
Greece and Lithuania both recorded annual inflation rates above 5% last month, while France saw annual inflation rise from 2.5% in April to 2.8% in May.
Inflation in the euro zone jumped to 3% in April, up from 2.6% in March, with oil and gas prices remaining elevated in the wake of the U.S.-Iran war.
Prior to the outbreak of the conflict in Iran, inflation in the euro area had dipped below the 2% threshold, leaving Europe particularly vulnerable 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, while the yield on Germany’s 10-year bund fell by 6 basis points.
Carsten Brzeski, global head of macro at ING, said the May inflation data paves the way for an ECB rate hike next week.
“A week ahead of the next ECB meeting, this is the expected uptick in inflation that will motivate the central bank to decide on an ‘insurance’ hike,” he said.
Brzeski added that the Iran war-induced energy shock had “become more permanent,” but noted that oil prices remain lower than levels forecast by many market watchers under a more adverse scenario regarding the length of the war.
“Nevertheless, for inflation in the eurozone, the only way is currently up,” he said. “Not a sharp up but a rather moderate and gradual lift. While knock-on effects from higher energy prices on other prices, like transportation and food, will be hard to avoid, the latest survey-based inflation expectations have come down a bit.”