It’s fair to say that inflation in Europe may have peaked already. Most recently, Eurostat, the statistics office, reported a surprisingly significant slowdown in inflation for May.

According to an initial estimate, consumer prices rose by 6.1 percent year-on-year last month, compared with inflation of 7.0 percent in April.

In a country comparison, inflation within the euro area is particularly high in the Baltic states, reaching double-digit levels. Comparatively low inflation rates can be found in Belgium (2.7 percent) and Spain (plus 2.9 percent).

Decline in energy prices fuels disinflation
The main reason for the decline in inflation in the euro area was the fall in energy prices, which fell by 1.7 percent in May – following an increase of 2.4 percent in April.

Previously, the sharp rise in prices for imported natural gas due to the war in Ukraine had pushed inflation up significantly.

Prices for food, alcohol and tobacco, on the other hand, continued to rise, albeit less sharply than recently: The price increase in May was 12.5 percent, compared with 13.5 percent in April.

The core inflation rate, which excludes food and energy prices, which are prone to fluctuation, fell to 5.3 percent from 5.6 percent in May.

Meanwhile, consumer inflation expectations also declined: According to a survey by ECB, euro area consumers expect inflation to reach 2.5 percent in three years.

Figures give hope for end of interest rate hikes, but no all-clear from central banks yet
Falling inflation rates give hope for an end to interest rate hikes soon, but central banks are still reluctant to give the all-clear. The official inflation target of 2.0 percent set by ECB and the Bank of England has not yet been reached. „A large part of the road has been covered, but the last stretch is still ahead,” warned ECB Vice President Luis de Guindos.

ECB Executive Board member Isabel Schnabel also sees no end in sight to interest rate hikes in the fight against inflation.

„We need to see convincing evidence that inflation will return to our two percent target in a sustainable and timely manner. We have not yet reached that point,” Schnabel said in an interview with Belgian daily De Tijd at the end of May.

It is therefore of great interest to all concerned whether the European central banks will stick to their rate hike course when they make their interest rate decisions soon.

The next interest rate decision by ECB is due next Thursday, June 15. The Bank of England and the Swiss National Bank (SNB) will decide on their interest rates on June 22.

Return to normality after years of low interest rates
But even if central banks do raise their interest rates, some financial experts believe the reaction from financial markets could be less severe than in the past.

In fact, stock markets may even take interest rate hikes as a sign of central bank confidence in the resilience of the economy and a return to normal.

Some economists view the past 15 years of extremely low inflation and low interest rates as an anomaly. Even if inflation rates decline and interest rate hike paths come to an end, we may not return to the levels of this exceptional period.

For many experts, this is supported by the fight against climate change and decarbonization.

„The ecological transformation of economies requires large investments that will drive up costs and thus inflation in the medium term,” said Princeton-based economist Markus Brunnermeier in a recent interview with Germany’s Handelsblatt.

ECB Director Isabel Schnabel also warned months ago that investments in climate-friendly policies could have lasting effects on price levels.

Article based on a story from Erste Asset Management as a copyright owner