Euro zone headline inflation fell to 2.5% in June, the European Union’s statistics agency said on Tuesday, while closely watched core inflation and services data remained stable.
The headline figure was in line with expectations of economists polled by Reuters. In May, inflation rose by about 2 percentage points to 2.6%.
Core inflation, which strips out the volatile effects of energy, food, alcohol and tobacco, was steady at 2.9% from the previous month, slightly below the 2.8% economists had expected.
The rate of increase in service prices also did not change, and remained stable at 4.1%.
Investors will now analyse what the latest data means for the path of interest rates in the 20-nation euro zone, following the European Central Bank’s initial 25 basis point cut in June.
The CPI had long been expected to be volatile this year, as the volatile base effects from the energy market receded.
In June, the annual energy price inflation rate in the euro area was 0.2%, a sharp turnaround from earlier in the year when the sector saw strong deflationary pull.
On Tuesday, European Central Bank Vice President Luis de Guindos told CNBC’s Annette Weisbach that while the central bank is confident that inflation will get closer to its 2% target, the coming months will be a “bumpy road” and there is no “predetermined path” for monetary policy. De Guindos was commenting on the sidelines of the ECB’s Central Banking Forum in Sintra, Portugal.
Financial markets are pricing in a high probability of two more rate cuts of 25 basis points each at the ECB’s remaining four meetings this year, according to pricing data from the London Financial Markets Group. Markets are pricing in just a 33% chance of another rate cut this month.
The euro, which has struggled in recent weeks amid political risks from the upcoming French elections, was slightly lower after the data. It was down 0.2% against the US dollar and 0.05% against the pound at 10:30 a.m. London time.
Other than a slight slowdown in food prices — with unprocessed food inflation falling to 1.4% from 1.8% — the latest CPI was “virtually a repeat of May’s data,” said Kyle Chapman, a foreign exchange analyst at Ballinger Group.
“This is enough to put an end to the ECB meeting this month,” Chapman said in a note. “Stiffness in service sector inflation may start to become a real concern for policymakers, putting a damper on interest rate cuts, especially against a backdrop of high wage growth and low unemployment.”
“There has been no significant downward trend in service sector inflation this year, and the ECB is unlikely to cut interest rates significantly until a downward trend emerges.”
Chapman added that interest rate expectations will depend on the macroeconomic forecasts issued by ECB staff each quarter, and whether they will move higher.
In June, ECB staff raised their forecast for average annual inflation for 2024 to 2.5% from 2.3%, and raised their forecast for 2025 to 2.2% from 2%.
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