Weak PMIs and sticky prices prompt calls for fresh ECB action amid stagflation fears

Eurozone business surveys released on May 21 pointed to a deeper downturn just weeks before the European Central Bank’s next policy meeting. S&P Global’s flash PMI data showed private-sector activity contracting at the fastest pace in more than two-and-a-half years, while Reuters reported that higher living costs linked to the Iran war were hitting demand and speeding layoffs. At the same time, European Union officials said oil and gas prices in Europe were likely to stay above pre-war levels until at least the end of 2027. Together, those data points have sharpened the policy dilemma facing ECB officials ahead of their June 10-11 meeting in Frankfurt. ### Why are weak PMIs getting so much attention now? S&P Global published its flash eurozone PMI on May 21, showing the composite index falling to 47.5 from 48.8 in April. A reading below 50 signals contraction, and Trading Economics said the May figure was the weakest since October 2023. Reuters reported that services activity was hit particularly hard as households faced higher costs. (money.usnews.com) Jonathan Cable of Reuters wrote on May 21 that euro zone economic activity “shrank at its sharpest rate in more than two-and-a-half years in May.” Reuters said the surveys also showed firms accelerating layoffs, adding to evidence that the slowdown was broadening beyond manufacturing. (pmi.spglobal.com) ### Where is the inflation pressure coming from if growth is weak? EU Economy Commissioner Valdis Dombrovskis said higher energy prices were a main driver of inflation, according to an Associated Press report published May 23. AP said EU officials expected oil and gas prices in Europe to remain above pre-Iran-war levels until at least the end of 2027, with other goods prices also likely to move higher. (money.usnews.com) The European Commission’s broader policy backdrop has also reflected concern about input costs. In a May 18 press release on fertilizer supply, the Commission said farmers were facing rising fertilizer costs and scarcity, linking price pressure to energy and import dependence. That does not set monetary policy, but it adds to the picture of costs staying elevated across parts of the economy. (apnews.com) ### Why does this leave the ECB in a bind before June 11? The ECB’s own calendar shows its next monetary policy meeting begins on June 10 and concludes on June 11 with a press conference. That leaves policymakers with little time between the May survey data and the rate decision. Standard Chartered said on May 1 that it expected a 25-basis-point ECB rate hike in June, reversing an earlier forecast for no change in 2026. (ec.europa.eu) Reuters reported that the bank based the shift on hawkish remarks from policymakers, though it said the call was not final and depended on incoming data. (ecb.europa.eu) Market-based tools tracking ECB-dated €STR futures also show investors focused on the June meeting as the next major decision point. The ECB Watch site says its methodology uses ECB-dated €STR futures to estimate the probability of rate changes across reserve maintenance periods tied to ECB meetings. ### What does “stagflation” mean in this case? The eurozone data now show two pressures moving in opposite directions. (money.usnews.com) Reuters described shrinking activity, weaker demand and faster layoffs, while AP described an energy-cost backdrop that officials expect to persist for more than a year. That combination is the one investors and economists usually associate with stagflation risk: weak growth alongside stubborn price pressure. (ecb-watch.eu) The ECB’s mandate remains price stability, as the central bank says on its website, and it defines that goal using euro-area HICP inflation. That means officials must weigh deteriorating activity data against any evidence that inflation could stay above target because of energy and related costs. ### What should readers watch next? June 10-11 is the next fixed date in this story, because the ECB Governing Council is scheduled to meet in Frankfurt and hold a press conference on June 11. (money.usnews.com) Before then, investors will be watching whether follow-up inflation data and any further PMI releases confirm the May pattern of contracting activity and persistent price pressure. (ecb.europa.eu 1) (ecb.europa.eu 2)