Eurozone inflation week provides a bit of relief

After the UK's third consecutive upside inflation surprise last week, the eurozone data for May have provided a little relief (charts 1-6). Looking at the national CPI measures, Spain started the trend, with the y-o-y rate dropping from 4.1% to 3.2%, followed by France (from 5.9% to 5.1%), and then Germany (from 7.2% to 6.1%). Italy was the exception, with inflation dropping from 8.2% to 7.6%, but still coming in higher than the consensus (7.2%). Indeed, demand appears to remain buoyant in Italy, and GDP has even revised up a touch for Q1 (chart 13).

Food price inflation led the downside moves, which is very welcome news. While the UK has not yet released May inflation data, the British Retail Consortium survey suggested that food price inflation had dropped from 15.7% to 15.4% in that month (though sadly, other components picked back up, taking the overall rate to an all-time high).

The combination of these downside surprises - even with the Italian exception - suggests there may even be downside risks to our already below-consensus forecast of 6.2% for tomorrow's eurozone print. Meanwhile, other indicators (charts 7-10) look somewhat disinflationary, but we would caution against drawing too firm a dovish conclusion from the latest data: the underlying cause of still sticky services inflation - wages - show no let-up, in Germany at least (charts 11 and 12).

Turning to activity, the news from Germany has not been good: GDP fell in Q1, confirming that Germany is in a technical recession, 25 May 2023, and then labor market data showed that the unemployment rate rose for the fourth consecutive month. Elsewhere, we have seen more positive news: UK retail sales were decent (chart 15), and consumer confidence was stronger in France and Germany (chart 17).

23 July: a diary date for fans of Spanish elections

Speaking of surprises, Spain's PSOE got a nasty one in last weekend's regional elections, with the opposition PP making such emphatic gains that PM Pedro Sánchez immediately called a snap general election for 23 July - five months earlier than due. The poll will be the fifth in nine years. While the PM will hope the local results were more of a protest vote, recent polls have consistently pointed to a large lead for the PP (Electocracia, 31 May), though that still might not be sufficient for the party to form a government on its own (see Madrid trip note, 28 April 2023).