Headline inflation in the euro area dropped to 2.5% in June, according to the European Union’s statistics agency on Tuesday, while the core and services inflation rates remained steady.
The headline figure matched the expectations of economists surveyed by Reuters. In May, inflation had risen slightly to 2.6%.
Core inflation, which excludes the volatile impacts of energy, food, alcohol, and tobacco, held steady at 2.9% from the previous month, just above the 2.8% forecast by economists.
The inflation rate for services also stayed unchanged at 4.1%.
Investors are now analyzing what this latest data means for the trajectory of interest rates in the 20-nation euro zone, following the European Central Bank’s (ECB) initial 25 basis point rate cut in June.
Volatility in the consumer price index has been expected this year due to fluctuating base effects from the energy market.
In June, year-on-year energy inflation in the euro zone was 0.2%, a significant shift from earlier in the year when the sector had a strong disinflationary impact.
On Tuesday, ECB Vice President Luis de Guindos told CNBC’s Annette Weisbach that while the central bank is confident that inflation will converge to its 2% target, the coming months will be a “bumpy road” with no “predetermined path” for monetary policy. He made these comments at the ECB Forum on Central Banking in Sintra, Portugal.
Money markets predict a high likelihood of another two interest rate cuts of 25 basis points each across the ECB’s remaining four meetings this year, according to LSEG pricing data. They price only a 33% chance of a follow-up cut this month.
Following the data release, the euro, which has been struggling due to political risks from the upcoming French elections, was slightly lower. It was down 0.2% against the U.S. dollar and 0.05% lower against the British pound at 10:30 a.m. London time.
Kyle Chapman, FX markets analyst at Ballinger Group, noted that aside from a slight cooling in food prices — with unprocessed food inflation falling to 1.4% from 1.8% — the latest consumer price index was a “virtual repeat of the May data.”
“That’s enough to set in stone a pause at this month’s ECB meeting. The stickiness in services inflation may start to become a real concern for policymakers that puts a spanner in the works for rate cuts, particularly given the backdrop of rising wage growth and falling unemployment,” Chapman said in a note.
“There has been no concrete downtrend in services inflation this year, and the ECB isn’t likely to cut rates significantly until one emerges.”
The interest rate outlook will depend on the quarterly ECB staff macroeconomic projections and whether they move higher, Chapman added.
In June, ECB staff raised their annual average headline inflation outlook for 2024 to 2.5% from 2.3% and increased their 2025 forecast to 2.2% from 2%.
