MNI 5 THINGS: Energy, Easter Send EMU HICP Close to ECB Target

-EMU May Flash HICP Released Thurs, Seen Up 1.9% On Year vs 1.2% in April

     LONDON (MNI) - Euro area inflation rose to 1.9% in May, up from 1.2% in

April, driven by the month's ascent in crude oil prices and a post-Easter

rebound in service sector inflation, data published by Eurostat Thursday

estimated.

     Post- release, we outline five themes for particular attention.

Oil surge, services rebound elevate headline inflation. 

     Energy inflation, up from 2.6% in April to 6.1% in May, a rebound in

services inflation, up 0.6pp to 1.6%, and a pickup in FAT (food, alcohol and

tobacco) prices, up 0.2pp to 2.6%, provided the impetus for the marked increase

in headline HICP in May. Across the 'big four', headline HICP either met or

breached the 2% threshold in three countries - Germany, France and Spain - with

the figures across the board coming in above analyst expectations.

     Table 1: 'Big four' breakdown

HICP (% y/y)  April  May (flash)

--------------------------------

Germany         1.4          2.2

France          1.6          2.0

Italy           0.5          1.1

Spain           1.1          2.0

Euro Area       1.2          1.9

Services drives core inflation up to eight-month high. 

Stripping away non-core elements like energy and food, core inflation still

estimated to have grown in May. Up 0.4pp, core HICP picked up to 1.1%, the

joint-highest since last August. The pickup was also entirely driven by the

service sector, which would have been partly explained by the early timing of

Easter this year relative to last year. That said, the public holidays across

the continent also played a role - with this effect reportedly particularly

strong in Germany.

Goods inflation worrying however. 

Services inflation, boosted by temporary factors as explained above, should

moderate in June and if goods inflation remains in its current, sluggish range

or 0.2%-0.3%, core HICP will likely fall back within a month.

Labour data point to wage pickup. 

Also published Thursday, labour market data showed unemployment in the Eurozone

drop 0.1pp to a post-crisis low of 8.5%. A regional breakdown showed the jobless

rate falling in both Germany and Spain, holding firm in France and actually

rising in Italy. If this were consistent with a pickup in wage growth in future

months, core inflation could well find further room to grow.

Consequences for ECB. 

The projected May rise bring headline HICP in line with the ECB's target (of

below, but close to 2%) for the first time in just over a year. The data will

aid hawks pushing for tightening of policy but it's worth remembering the

month's surge in prices was predominantly driven by higher oil prices, which

given its external nature could be looked through by the ECB. A sustained pickup

in domestic inflationary forces, forcing core HICP up further, would be a more

convincing argument for the hawks.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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