Key Takeaways
- Services expected to be the main driver of headline inflation.
- An escalation in the Israel-Iran war could push energy prices up again.
- ECB expected to hold interest rates on July 24 after a cut in June.
The latest eurozone inflation data will be released by Eurostat on July 1, amid a rise in energy prices in June because of the conflict in the Middle East.
Headline inflation is forecast to have risen by 2% on June 2024 levels, according to FactSet consensus estimates, and above May’s reading of 1.9%.
Core inflation, which shows prices without volatile components such as energy and food costs, is expected to have risen by 2.3% year on year in June, the same as May.
“European inflation is expected to land on 2% for June, bang-in-line with the European Central Bank’s targeted level. Although trade talks with the US lurk in the background, inflation in Europe seems very much under control for now, which should appease equity markets,” says Michael Field, chief European market strategist at Morningstar.
“It’s not just the headline numbers that are pleasing however, core inflation is expected to remain flat at 2.3%, again not far off the central bank’s key 2% level.”
In May 2025, service inflation remained the main driver of headline inflation (HICP), with its contribution at 1.47 percentage points. The contribution of food, alcohol and tobacco stood at 0.62 percentage points, and the contribution of energy at -0.34 percentage points. Non-energy industrial goods provided a 0.16 percentage points boost.
European Energy Prices Could Rise Again
Energy prices rose by around 15% compared to the April/May average following Israel’s attack on Iran on June 13, largely reflecting an increase in geopolitical risk. They subsequently fell following the announcement of the ceasefire, and Brent prices are now around USD 65 per barrel and TTF natural gas prices around EUR 36 per megawatt-hour. However, an escalation could push prices up again, analysts predict.
“Although our baseline scenario is for Brent and TTF prices to fall to USD 60 per barrel and EUR 36 per MWh by the end of the year, scenarios involving a reduction in Iranian supply or a wider disruption of oil and gas production and transportation in the region could lead to further increases in energy prices,” Goldman Sachs said in a note on June 20.
The analysts predicted that the energy price moves seen so far should boost year-over-year headline inflation by around 0.4 percentage points over the next year. In an extreme scenario, energy prices could add a further 1.8 percentage points to headline inflation over the coming year.
Martin Wolburg, senior economist at Generali Investments, says eurozone headline inflation should hover around the 2% over the coming months: “Following its fall to 1.9% year-on-year in May, less favorable disinflation from energy prices and somewhat rebounding services prices should lift the headline number to 2.0% year-on-year.”
Looking further ahead, much will depend on where oil prices go next. However, Wolburg says that underlying inflation of currently 2.3% year-on-year settles at a path consistent with the ECB’s 2% target.
Will the ECB Cut Interest Rates in July?
The European Central Bank’s next monetary policy meeting will take place in Frankfurt on July 24, after the ECB cut its key interest rate by 25 basis point to 2% on June 5. With no meeting in August, more than 50% polled by Reuters expect the central bank to cut rates once more this year, most likely in September.
During June’s meeting, ECB President Christine Lagarde reaffirmed the ‘data-dependent’ approach to determining the policy stance, hinting at a pause.
“Higher energy price volatility means the ECB will look even more closely at underlying inflation. We expect one more ECB rate cut in September, though President Lagarde will be happy that she can use the recently announced pause to see how things play out before deciding whether to cut rates below neutral,” said ING economists in a note on June 13.
Morningstar’s Field notes that the low level of inflation keeps the pressure off the ECB, adding that lower interest rates still offer “modest upside potential” to equity markets following the post-April rally.
