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In June, Eurozone inflation dropped to 5.5%, its lowest rate since last year’s beginning. However, core consumer price growth experienced a slight rebound, which tempered relief for policymakers.
The EU’s statistical office reported that annual inflation in the single currency zone decreased from 6.1% in May to 5.5% in June, lower than the forecasted 5.6% from a Reuters poll of economists.
On the other hand, core inflation, which excludes energy and food, rose from 5.3% in May to 5.4% in June. This setback for the European Central Bank (ECB) goes against its goal of raising interest rates until underlying price pressures reach its 2% target.
Jack Allen-Reynolds, an economist at research group Capital Economics, stated that the latest release wouldn’t deter the ECB from raising interest rates by another 25 basis points at the July meeting. He also noted that there was a good chance of another hike in September.
Investors reacted positively to the possibility of interest rates in the Eurozone reaching their peak soon. European stocks rallied, with the pan-European Stoxx 600 rising by 1.1%, and France’s Cac 40 and Germany’s Dax both advancing by 1.2%. Initially, the euro fell against the dollar after the inflation data release but later recovered, trading up 0.5% at $1.092.
Energy prices in the eurozone fell 5.6% from the previous year to June, representing a steeper decline compared to the 1.8% decrease in May. There was also a slowdown in food, alcohol, and tobacco inflation to 12.5%, while industrial goods inflation dipped to 5.5%.
However, these decreases were offset by a rise in services prices to 5.4%, reaching a record high for the eurozone. This increase was driven by a surge in German transport prices following a rise in ticket costs for buses and trains, which were heavily subsidized last summer.
Melanie Debono, an economist at research group Pantheon Macroeconomics, commented that although the core rate rose and is expected to remain stable over the summer, other components are showing a clear softening trend.
Inflation fell in 18 out of the 20 eurozone countries, with only Germany experiencing an increase and Croatia remaining flat. Price growth also dropped below the ECB’s 2% target in Spain, Belgium, and Luxembourg for the first time in over a year.
During the ECB’s annual conference in Sintra, Portugal, ECB president Christine Lagarde stated that they cannot declare victory yet in the fight against inflation. The bank raised its price growth forecasts earlier this month, anticipating a 14% increase in eurozone wages by 2025, which could lead to higher prices in the labor-intensive services sector.
Lagarde further mentioned the expectation of several years of rising nominal wages and unit labor cost pressures due to subdued productivity growth.
In May, the eurozone labor market continued to tighten, with jobless numbers falling by 57,000 compared to the previous month. The unemployment rate remained at an all-time low of 6.5%, according to Eurostat.
Eurozone inflation has declined at a slower rate than in the US, where it reached 4%
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