Euro area inflation eased to 1.9 percent in May 2025, in line with the consensus and slipping below the ECB's 2 percent target for the first time in over a year, down from 2.2 percent in April and 2.6 percent in May 2024. This decline signals a strengthening disinflationary trend across the bloc, though the picture remains mixed at the national level, fourteen Member States saw falling inflation, while twelve experienced a rise.

Services remained the dominant driver of inflation, contributing 1.47 percentage points (pp), reflecting sustained wage and demand pressures in the sector. Food, alcohol, and tobacco added 0.62 points, showing the stickiness of consumer essentials. Non-energy industrial goods made a modest contribution (0.16 pp), while energy prices pulled inflation down (minus 0.34 pp), continuing their deflationary drag amid subdued global oil prices and base effects.

Inflation fell across the top four economies in the area, in Germany (2.1 percent after 2.2 percent), in Italy (1.7 percent after 2.0 percent), in Spain (2.0 percent after 2.2 percent) and in France (0.6 percent after 0.9 percent). Over the month, the inflation rate and core inflation did not change, which is in line with their consensus expectations.

The fall below the 2 percent threshold may give the ECB more room to manoeuvre on interest rates, especially as core inflation appears to be stabilising. However, persistent service-sector inflation could temper expectations of aggressive monetary easing. This latest update takes the RPI to 2 and the RPI-P to 20, meaning that economic activities are ahead of the expectations within the bloc.

No revision expected from the flash at 1.9 percent for HICP and 2.3 percent for narrow core.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the European Monetary Union, where monetary policy decisions rest on the ECB's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.