Disinflation in the EU is progressing faster than anticipated, as trade tensions dampen growth, outweighing the impact of rising food prices and persistent short-term demand pressures. Headline inflation, after averaging 2.6 % in 2024, fell to 2.4 % in April 2025, largely due to declining energy prices, particularly oil, though food inflation remained high at 3.5 % due to elevated unprocessed food costs. Core inflation edged up slightly to 2.8 %, driven by persistently elevated service inflation.
The preliminary estimate for May places eurozone inflation at 1.9 %, falling just below the 2 % target. Looking ahead, EU inflation faces downward pressure from three main factors: declining energy prices and negative energy inflation for consumers, heightened competition in non-energy goods due to shifting US-China trade dynamics, and the stronger euro’s disinflationary effect on imports. The ECB cut interest rates by 25 basis points in June 2025, reacting to uncertainty and reduced confidence among households and firms, bringing the deposit facility rate – the rate through which the ECB steers the monetary policy stance – to 2 %.
In its recent financial stability report, the ECB highlighted three key risks to financial stability, (i) high market valuations, which could lead to sudden corrections; (ii) slower growth and increasing credit risks for banks and businesses; and (iii) rising fiscal pressures from higher defence spending, threatening debt sustainability.
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