Inflation slides to 1.9% in Europe, as worries shift from prices to Trump and tariffs

Key Points

• Eurozone inflation dropped to 1.9% in May from 2.2%, falling below the ECB’s 2% target for the first time since September due to lower energy prices.
• With inflation back under control, the ECB’s benchmark rate (currently 2.25%) is expected to be cut by 25 basis points on Thursday, and President Christine Lagarde has hinted at at least one more cut ahead.
• President Trump’s tariff hikes—including steel, aluminum and autos up to 25% (soon 50%) and a proposed 20% levy on all EU goods—threaten Europe’s export-oriented economy.
• Worries over U.S. import taxes have prompted the European Commission to slash its 2024 growth forecast for the euro area to 0.9% from 1.3%, underscoring the economic risks.

FRANKFURT, Germany (AP) — Inflation in the 20 countries that use the euro fell to 1.9% in May from 2.2% in April, clearing the way for more rate cuts from the European Central Bank to support growth in the face of U.S. President Donald Trump's tariff offensive.

Lower energy prices helped bring consumer prices in May to below the ECB's 2% target for the first time since September. Increasing signs that inflation is back under control after a painful outbreak in 2021-23 leaves room for the ECB to turn its attention to worries about the impact of a slew of new import taxes on EU goods in the US that threaten to slow Europe's export-oriented economy.

Reductions in the ECB's benchmark rate, currently at 2.25%, lower borrowing costs throughout the economy, making it easier to buy things on credit and stimulating economic activity and investment. Higher rates combat inflation, but for the moment that battle appears to have been won.

The ECB's rate-setting council meets on Thursday under bank President Christine Lagarde to determine the next step on rates. Analysts expect a cut of a quarter percentage point and for Lagarde to indicate that at least one more cut is possible at future meetings.

Trump has raised tariffs on steel, aluminum and autos from almost all trading partners to 25%, and has now said he will raise the rate to 50% on steel, as well as proposing a 20% tariff on all European Union goods. That last tariff has been paused ahead of a July 14 deadline pending negotiations with EU officials. Worries about the impact of tariffs on growth led the European Union's executive commission to cut its growth forecast for the 20 euro member countries this year to 0.9% from 1.3% in its fall 2024 forecast.