Consumer prices in the eurozone increased slightly to 2.0% year over year in June, according to Eurostat’s flash estimate, up from May’s reading of 1.9%, and in line with expectations.
Core inflation, which shows prices without volatile components such as energy and food costs, rose 2.3% year over year in June, in line with May and down from 2.7% in April.
“As expected, European inflation landed 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.
Eurozone Services Inflation Higher
According to Eurostat’s estimates, services are expected to have risen by 3.3% year over year in June, higher than May’s reading of 3.2%. Food, alcohol and tobacco prices are forecast to have risen by 3.1%, compared with 3.2% in May, meanwhile non-energy industrial goods are expected to have increased by 0.5%, compared with 0.6% in May.
Energy prices, on the other hand, are forecast to fall by 2.7%, compared with a fall of 3.6% in May. A brief spike in oil prices amid fighting between Israel and Iran had quickly subsided.
According to Riccardo Marcelli Fabiani, lead economist at Oxford Economics, June’s inflation numbers suggest that disinflation in the eurozone is likely to continue.
“The appreciation of the euro will mean lower import costs. And most importantly, domestically produced services inflation is set to continue declining thanks to wage growth easing,” adds Fabiani.
Felix Feather, economist at Aberdeen Investments, agrees: “Inflation will likely dip below target from here given relatively cheap oil prices, the strength of the euro, and lukewarm domestic demand.”
According to Generali Investments senior economist Martin Wolburg, “the key reason of the rebound in June was less disinflation from energy prices that had increased for geopolitical reasons over the last month.”
“Looking beyond today’s data key indicators like wage growth led us to expect that underlying inflation lastingly settles at a path consistent with the ECB’s 2% target,” he adds.
Is the ECB at the End of the Rate-Cutting Cycle?
Will the ECB Cut Rates in July?
The European Central Bank’s next monetary policy meeting will take place on July 24, and markets expect that the easing cycle will pause. The ECB cut its key interest rate by 25 basis points to 2.00% on June 5. This was the eighth since the easing cycle began a year earlier. In total, the ECB has halved its key deposit rate from 4% to 2% in just over a year. Now, just four scheduled monetary policy meetings remain in 2025.
According to Morningstar’s Field, this low level of inflation keeps the pressure off the ECB, which may already be close to its final destination for this rate-cutting cycle. After a period of dovish monetary policy, modest upside remains in equity markets after the latest rally.
Oxford Economics economist Fabiani says the central bank “will likely pause in July to assess incoming data, wary of high uncertainty. But lukewarm growth momentum should weigh on demand-side price pressures and lead to a cut in Q3.”
Aberdeen’s Feather also expects the ECB to cut rates again this year, though risks around this forecast remain. “Over the medium term, fiscal expansion from defense and infrastructure spending should have a somewhat inflationary effect,” he says. “The ECB will therefore be reluctant to cut aggressively, meaning only a modestly accommodative stance is likely.”
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