Energy prices weigh on consumption, eurozone retail sales unexpectedly decline, and stagflation casts a shadow over the European Central Bank’s rate-hiking path

⑴ Data released by Eurostat on Thursday showed that retail sales in the eurozone fell by 0.4% month-on-month in April, weaker than the market expectation of a 0.3% decline. The previous value was revised up to an increase of 0.8%. Sales of automotive fuels recorded the largest drop since August 2023, indicating that the energy price surge caused by the war between the US, Israel, and Iran has begun to erode consumers' spending power.⑵ Although the labor market remains relatively robust, consumer confidence in May improved only slightly and overall remains close to the trough seen during the 2008 global financial crisis. Economists point out that consumer confidence has continued to decline since the outbreak of the Iran war, coupled with weak business surveys, the eurozone economy may contract in the second quarter. Real wage growth is slowing, with real wages in some countries having outright fallen, and households' disposable income for shopping and dining is decreasing due to high oil prices.⑶ The eurozone's annual inflation rate accelerated to 3.2% in May, higher than 3.0% in April and 1.9% in February. Core inflation also rebounded, showing that energy costs have begun to be passed on to other prices. The market widely expects the European Central Bank to raise interest rates this month, and it may take further action in July. However, with households already starting to cut spending, the room for the central bank to tighten policy sharply is limited, and policymakers are facing a tough balance between fighting inflation and supporting growth.