Eurozone Inflation Preview: What to Expect from June's Data

Morningstar

Markets are looking to flash eurozone inflation figures for June that are due on Tuesday, July 2. Inflation is forecast to have fallen back to 2.4% on the year before, the rate seen in April, according to FactSet consensus estimates. Prices increased by 2.6% in May from a year ago, above economist expectations.

Core inflation, which shows prices without energy and food costs, increased by 2.9% in May on a year on year basis.

“Although we still expect some volatility in inflation readings, June’s downward move would be most welcome, and reaffirms the European Central Bank’s action in cutting rates on June 6,” said Michael Field, European market strategist at Morningstar.

“Possibly even more important than the move in headline inflation would be the drop in core inflation, because it is the measure that central bankers pay close attention to, given that it strips out the volatile components such as food and fuel, and gives a more accurate picture of inflation.”

Service Inflation is the Last Mile

In May, the greatest contributors to the annual euro area inflation rate (HICP) were services (+1.83 percentage points, pp), followed by food, alcohol & tobacco (+0.51 pp), non-energy industrial goods (+0.18 pp) and energy (+0.04 pp), according to official data source Eurostat.

Service inflation rose from 3.7% in April to 4.1% in May, a concern for policymakers.

“Inflation is unlikely to recede until year end, due to the intrinsic rigidity of services prices,” said Ombretta Signori, head of macroeconomic research and strategy at Ofi Invest Asset Management in a note on June 24.

“Meanwhile, wage momentum, a variable highlighted by the ECB, stayed high in the first quarter (4.7% year-on-year, vs. 4.5% in the fourth quarter 2023). Based on the ECB’s wage projection index, replies from companies to the ECB’s phone survey, and wage data from new job offers, we can expect wage growth to top off at about 4% this year and not to normalise until 2025.”

When Will the ECB Cut Rates Again?

The ECB confirmed the data-dependent approach to the path of rates in its latest economic bulletin published on June 20, so June’s inflation data will be closely followed.

“Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year”, the ECB said.

Morningstar’s Field added: “With the ECB enacting its first rate cut in June, all

The full article is available here. This article was published at Morningstar Economics.