Preliminary inflation readings for June released on Tuesday showed a broad deceleration across Europe’s largest economies, easing pressure on the European Central Bank (ECB) to move quickly on interest rates ahead of its next policy decision.
Economists polled by Reuters have projected euro zone inflation at 3.0% for June, but the national figures published so far suggest the overall bloc number, due on Wednesday, could come in lower than that forecast.
Country-level readings
In Germany, headline inflation slowed to 2.4% in June from 2.7% in May, below the 2.5% Reuters poll forecast. Core inflation in Germany remained unchanged at 2.5%, indicating that energy cost moves have not yet broadly transmitted into the wider price structure. The drop in German headline inflation reflected a 5% fall in energy prices; services price inflation softened to below 2% and prices for manufactured goods declined by 0.9%.
French inflation fell more sharply, slipping to 2.0% in June from 2.8% in May, matching the ECB’s 2% target and undercutting expectations of 2.3%.
Italy’s reading also eased slightly, moving to 3.1% in June from 3.2% in May, contrary to forecasts that had predicted no change.
Spain was the exception among the region’s largest economies: June inflation held at 3.6%, unchanged from May and above the 3.4% expected.
Policy implications and market context
Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, said: "Upside risks to inflation have declined markedly." He added that, while expectations remain elevated and energy prices could rise again, "there is no pressing need for the ECB to raise interest rates further."
A sharp drop in energy prices in recent days has lessened near-term pressure on ECB policymakers ahead of their July meeting. Nevertheless, four sources told Reuters that the case for a modest rate hike at a later date remains intact.
Outlook
With national inflation prints in Germany, France and Italy running softer than expected and Spain standing apart, markets will turn to the euro zone-wide headline figure due on Wednesday to see whether the bloc-wide rate of inflation confirms the easing signalled by these national numbers.