Key Takeaways
- Eurozone flash inflation fell to 2.8% in June, according to Eurostat estimates, below the consensus forecast of 3.0%.
- Core inflation also dipped more than expected to 2.4%, marking a slight decrease from May’s 2.5%.
- Higher energy costs continue to weigh on inflation, but pressure on the ECB appears to have eased ahead of its July meeting.
Consumer prices in the eurozone fell to 2.8% in June, according to preliminary data released by Eurostat, ahead of consensus estimates of 3.0%. The latest reading marks a steeper-than-expected drop from May’s 3.2% print, though inflation remains above the European Central Bank’s medium-term inflation target of 2%.
The easing of price rises was largely driven by a dip in energy costs amid ongoing talks between the US and Iran to extend their ceasefire and reopen the Strait of Hormuz. Energy costs rose around 8.7% in June compared with 10.8% in May.
“Investors will be pleased to see inflation lower in June at 2.8%, down from 3.2% in May and below economists’ expectations. Although this remains above the European Central Bank’s 2% target, it is at least moving in the right direction,” says Michael Field, chief European markets strategist at Morningstar.
Core inflation, which excludes volatile components such as energy and food, came in at 2.4%, slightly below the 2.5% estimated and previously recorded in May.
“With markets close to all-time highs, and indeed touching off the top of our valuations, it’s unlikely that this news will be met with jubilation. That said, investors will be quietly pleased that inflation is not the concern it was just a couple of months ago,” Field adds.
Will the ECB Raise Interest Rates This Month?
Last month, the ECB raised interest rates by a quarter point to 2.25% in response to the Middle East energy shock, marking its first hike since September 2023.
June’s implied drop in both overall and core inflation is now expected to ease pressure on the central bank to raise rates at its next meeting on July 23. June’s inflation reading sees headline inflation below and core inflation in line with the ECB’s baseline projections.
“We think the decline is sufficiently broad to assuage worries about potential second round effects and cements our view that the ECB will hold rates in July,” say Tomas Dvorak, senior economist at Oxford Economics.
Morgan Stanley economists said the larger-than-expected drop in June could also “lower the bar a touch for the ECB to be on hold in September,” adding that energy pressures likely had a “limited” direct impact on eurozone prices.
Following Wednesday’s print, traders nevertheless continued to expect the ECB to deliver another quarter-point rate rise by the end of this year.
Oil prices have in recent days returned to roughly prewar levels, with Brent crude futures trading around USD 72 per barrel on Wednesday. The European benchmark price for natural gas, the Dutch futures contract TTF, remains slightly above late-February levels at EUR 43 a megawatt hour.
Inflationary Pressures Mixed Across the Eurozone
The inflation picture was mixed within the 21 nations sharing the euro currency, with eastern and Southern European members bearing the brunt of price rises.
Lithuania marked the bloc’s highest annual rate in June at 5.5%, followed by Bulgaria at 5.3%. Croatia and Cyprus also recorded inflation rates of 4.0% and above.
German inflation cooled to 2.4% from 2.7% a month earlier, while France’s rate dropped to 2.0% from 2.8%.
