Key Takeaways
Eurozone companies' selling-price expectations eased across all business sectors in May, interrupting a two-month steep upward trend, even as a business confidence index edged higher, a European Commission survey showed Thursday.
The cooling of price expectations offers the European Central Bank some breathing room as it prepares for its June 11 policy meeting, where swaps markets are pricing an 88% chance of a 25-basis-point rate hike. The survey's selling-price expectations component declined across manufacturing, services, retail and construction — the first synchronized pullback since February.
"The broad-based easing in price expectations suggests the passthrough from higher energy costs may be peaking, which reduces the urgency for aggressive tightening," said James Okafor, macro strategist at Edgen. "But the ECB will need to see this sustained for at least another month before adjusting its forward guidance."
The business confidence index — a composite measure covering industry, services, retail trade and construction — rose modestly in May, the commission said, without disclosing the exact level. The improvement was driven primarily by the services sector, where firms reported slightly more optimistic demand expectations.
The data comes as the Eurozone economy shows signs of strain from the Middle East conflict and elevated energy prices. The S&P Global Eurozone Composite PMI fell to 47.5 in May from 48.8 in April, its steepest pace of contraction in two-and-a-half years, with services activity declining to 46.4 and manufacturing slipping to 51.4. The European Commission this week forecast 2026 Eurozone GDP growth of just 0.9%, down from 1.4% in 2025, while inflation is projected to accelerate to 3.0% from 2.1%.
Price Expectations Break the Trend
The selling-price expectations index had risen sharply in March and April as companies passed on higher energy and input costs linked to the Iran conflict and disruptions to Strait of Hormuz shipping. Brent crude averaged above $100 a barrel in April and May, though it has since retreated to around $94 on optimism that US-Iran nuclear talks may yield a deal.
The cooling in May suggests the passthrough may be losing momentum. In manufacturing, the share of firms planning to raise prices fell for the first time since February. In services — where price pressures had been most persistent — the share also declined, though it remains above its long-run average.
The German 10-year Bund yield, the benchmark for Eurozone borrowing costs, stood at 3.097% Thursday, little changed on the session. The euro traded at $1.1623, near its weakest level since early April.
What It Means for the ECB
The ECB has raised its deposit rate by 200 basis points over the past year to combat inflation that remains above its 2% target. The commission's latest forecast sees Eurozone CPI averaging 3.0% in 2026, well above the ECB's goal.
The cooling of selling-price expectations, if sustained, could reduce pressure on the ECB to deliver additional hikes beyond June. However, the central bank has emphasized that it will set policy meeting by meeting, guided by incoming data. The next ECB decision is on June 11, followed by the July 23 meeting.
"The risk for the ECB is that one month of easing in price expectations is not enough to declare victory," Okafor said. "Wage growth remains elevated, and the services sector is still reporting above-target price increases. The June hike is all but priced in; the question is what comes after."
This article is for informational purposes only and does not constitute investment advice.
