UBS expects Eurozone inflation to rise in May

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UBS expects Eurozone inflation to rise in May

UBS projected that Eurozone headline inflation is set to temporarily increase in May 2023. The firm anticipates a slight uptick of 0.1 percentage points to 2.5% year-on-year, driven by higher energy inflation. Despite an expected monthly decline in energy prices, a significant positive base effect is likely to elevate the annual energy inflation rate.

The final Eurozone Harmonised Index of Consumer Prices (HICP) for April, released on May 17, showed a steady headline inflation rate of 2.4% year-on-year. The report noted a decrease in core inflation, which excludes volatile food and energy prices, to 2.7% year-on-year, down from 2.9%.

This was balanced by a rise in energy inflation, which lessened its year-on-year decline to -0.6%, and an increase in food inflation to 2.8% year-on-year.

The analysis by UBS highlighted a decline in the monthly non-seasonally adjusted goods inflation rate in April, which was lower than in any of the previous five years. However, the decline in services inflation was attributed to the unwinding of the Easter effect.

Excluding travel-related items, the monthly change in non-seasonally adjusted services inflation was consistent with the rates observed in April of the previous two years.

The report also indicated that the annualized three-month rate of seasonally adjusted services inflation climbed to 5.3% year-on-year due to a low base in the latter months of 2023. Meanwhile, underlying inflation measures and the breadth of inflation continued to show a downward trend for the second consecutive month in April.

UBS expects core inflation to remain stable at 2.7% year-on-year in May, with goods inflation holding at 0.9% and services inflation experiencing a temporary rise to 3.8% due to travel-related components. Food inflation is predicted to decrease slightly to 2.7% year-on-year.

At the country level, inflation rates are forecasted to vary, with Germany, France, Spain, and the Netherlands seeing increases, while Italy is expected to witness a decline. The next inflation update is scheduled for release on May 31.

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