Euro Area Annual Inflation Reaches 2% in May 2021

The annual inflation in the Euro area reached 2% in May. Is the ECB under pressure to act now that the Fed started to remove the accommodative measures?

One of the most important economic releases for the Euro area was released yesterday – the annual inflation rate. As usual, it is calculated both for the Euro area and the European Union as a whole, and a close look at the report reveals some interesting takes for prices of goods and services in Europe.

The Consumer Price Index (CPI) data is considered as the most important data in the Euro area, certainly one piece of economic data that the European Central Bank keeps an eye on. The central bank has an inflation-targeting framework, and it aims at bringing inflation below but close to 2%. If it does so, it means the mandate is achieved.

It comes in sharp contrast with the Federal Reserve of the United States mandate, for example, that looks at the employment component as well and balances its decision based on job creation and inflation data. Yesterday’s release is even more important because only one year ago, inflation in the Euro area was only at 0.1%.

Details of the Euro Area Inflation Report

This particular report does not have a tremendous impact on financial markets. Because the CPI Flash Estimate and the German Preliminary CPI are released fifteen days earlier, the info is somehow priced in. However, the confirmation is important for ECB watchers and for anyone trading the euro.

The report showed that the lowest inflation rate was registered in Greece and Malta, at -1.2%, and +0.2% respectively. The highest inflation in the Euro area was registered in countries like Luxembourg and Austria, where the inflation rate reached 3% and 4% respectively in May.

The common currency traded with a weak tone yesterday when the inflation data hit the wires, but the move was due to the Fed’s decision a day earlier to start removing the monetary stimulus. That explains the weakness in the EUR/USD pair but does not explain the weakness in the EUR/JPY cross. Hence, we may say that the inflation data did impact the euro crosses, as market participants start building expectations that the ECB will follow in the Fed’s footsteps.