Eurozone inflation met the ECB’s expectations, giving Lagarde a stable path for the future.
Eurozone inflation eased in June in line with market expectations, though its core level, a measurement excluding volatile food and energy, was higher than estimated. This is the first inflation reading since the European Central Bank slashed interest rates at its June meeting.
Inflation in the 20 countries using the euro dropped to 2.5% annually, down from 2.6% in May. In April, inflation was even lower at 2.4%. At the core level, Eurozone inflation remained stable at 2.9% missing the 2.8% expectation by Reuters-polled economists.
Service prices remained the highest source of annual inflation, remaining at 4.1% year-on-year. Energy prices also slightly edged up at 0.2%. Overall - except for a slight decrease in food prices - the latest inflation reading was a “virtual repeat of the May data,” Kyle Chapman, FX markets analyst at Ballinger Group, said.
Between member nations, Belgium had the highest inflation overall at 5.5%, the worst reading since August 2023. Neighboring Netherlands also saw a steep price rise at 3.5% from 2.7%.
Germany, the EU’s biggest economy, saw inflation slowing to 2.5% from 2.8%. France’s prices cooled to 2.5% from 2.6% in May. Finally, Italy’s inflation remained the lowest among the EU’s big economies at 0.9%, a slight increase from May’s 0.8%.
leggi anche
Was QE worth it?
Future rate cuts
June’s inflation reading confirmed the ECB’s prediction of a stable, albeit slow, path toward the 2% target. Last month, the ECB increased its 2024 inflation forecast to 2.5% from 2.3%, and the 2025 forecast to 2.2% from 2%.
However, the ECB deemed inflation low enough to start slashing interest rates. After bringing them to a record-high 4%, the ECB lowered rates to 3.75% in June.
Markets currently price in two additional cuts in 2024, though the likelihood of another one already happening in July is only 33%.
“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,” Kyle Chapman said.
ECB President Christine Lagarde warned about the several concerns the committee still has on inflation. “We will not rest until the match is won and inflation is back at 2%,” she said.
Moreover, the US Federal Reserve will most likely wait to cut interest rates until September. Widening the gap between the USD and EUR interest rates could disrupt trade between the two sides of the Atlantic. The ECB will therefore likely wait for the Fed to cut interest rates before implementing another slash.
