In June, year-on-year inflation in the euro zone fell back to 5.5%, mainly due to lower energy prices. However, underlying data indicate that the European Central Bank (ECB) will continue to raise interest rates. According to Eurostat, the European Union’s statistics agency, inflation in the Eurozone was 6.1% in May.
The June result was slightly better than expected by Bloomberg analysts, who had expected inflation of 5.6%. In terms of inflation components, Eurostat highlighted the notable decline in the energy segment, which registered -5.6% in June after falling a modest -1.8% in May. The food segment (including tobacco and alcohol) decreased from 12.5% in May to 11.7% in June.
Despite this slowdown, the food segment remains the main driver of inflation due to its persistently high level. Services prices rose by 5.4% in June, four tenths higher than in May, while non-energy industrial goods fell slightly from 5.8% in May to 5.5% in June.
Among the major Eurozone economies, Germany experienced a considerable increase in June, with inflation at 6.8% compared to 6.3% in May.France recorded inflation of 5.3% in June (6.0% in May), and in Italy it was 6.7% (8.0% the previous month). Spain performed well in June, with inflation estimated at 1.6%, a sharp drop from 2.9% in the previous month. Slovakia had the highest year-on-year inflation in the Eurozone in June, at 11.3%, while Luxembourg recorded the lowest, at 1%.
Economist Jack-Allen Reynolds of Capital Economics notes that core inflation “indicates that the ECB will keep interest rates high.” Although the overall inflation rate shows a strong downward trend, service inflation shows no signs of falling. According to Reynolds, this report will not prevent the ECB from raising rates by another 25 basis points at the July meeting.
Bert Colijn, economist at ING Bank, also notes that headline inflation continues to fall rapidly due to the effects of energy prices, but core inflation rose again in June.In addition, concerns about sustained wage growth persist, as the unemployment rate remained at record lows in May. Colijn expects the ECB to continue raising rates in July and September, as he believes it is more costly to do too little in terms of increases than to do too much.