Euro zone inflation rises to 3.2%, backs ECB rate hike hopes

Hotter inflation is tightening the squeeze on households and borrowers just as the European Central Bank heads into a pivotal June meeting, with price pressures strengthening the case for another rate hike and prolonging the pain of higher borrowing costs.

Euro area consumer prices rose 3.2% from a year earlier in May, up from 3.0% in April and still well above the ECB’s 2% target. The move was driven by a 10.9% surge in energy costs and a sharper-than-expected rise in services inflation to 3.5% from 3.0%. Core inflation, which strips out food and energy, also climbed to 2.5% from 2.2%, a sign that underlying price pressure has not eased as quickly as policymakers had hoped.

The data land just ahead of the ECB Governing Council’s June 10-11 meeting in Frankfurt, with a press conference set for June 11. Financial markets have already priced in a 25-basis-point increase, which would lift the deposit rate to 2.25%, and traders are also betting on one or two more moves later this year. The ECB says the deposit facility rate is the tool through which the Governing Council steers the monetary policy stance, making next week’s decision a crucial signal for lenders, savers and mortgage holders across the currency bloc.

Capital Economics economist Andrew Kenningham said the higher headline and services readings reinforce the case for an increase and suggest upside risks may be stronger than previously thought. Olli Rehn, one of the ECB’s policymakers, has described a June hike as an insurance move rather than a response to entrenched inflation, a signal that the central bank still sees its tightening path as measured rather than abrupt.

The inflation numbers also deepen the policy dilemma. The European Commission’s Spring 2026 Economic Forecast, published May 21, projected euro area growth of just 0.9% this year and inflation of 3.0% in 2026, before easing to 2.3% in 2027. It warned that oil prices above $100 a barrel would push inflation higher and depress sentiment among firms and households, especially as conflict in the Middle East adds to energy-market strain.

That backdrop leaves the ECB balancing credibility against economic drag. Inflation has now topped 3% for the first time in more than 2 1/2 years, but growth remains subdued and households are already absorbing the cost of pricier credit, energy and everyday services. The latest reading suggests the central bank is unlikely to step back yet, even as every additional hike raises the risk that the cure becomes a fresh source of weakness for the euro area economy.