Eurozone inflation slows to 2.5%

Eurozone inflation slowed to 2.5 per cent in June, but policymakers will remain concerned by strong increases in services prices that partly offset weaker growth in energy and fresh food costs.

The figure for the year to June marked a slowdown from 2.6 per cent in the previous month. It was in line with economists’ forecast of 2.5 per cent in a Reuters poll.

After an acceleration in May, slowing price rises in the 20 countries that share the euro will provide some relief for the European Central Bank, which last month started to cut interest rates in expectation of inflation hitting its 2 per cent target by next year.

But rate-setters will still be concerned about persistently high services inflation. Price growth in the sector was 4.1 per cent in the year to June, matching the seven-month high reached in May, according to data published by the EU’s statistics office on Tuesday.

Economists said the figures made it likely that the ECB would keep its benchmark deposit rate at 3.75 per cent at its next meeting on July 18 and further reductions in borrowing costs could hinge on how quickly services inflation comes down.

“The fact that services inflation, which is most sensitive to domestic economic conditions, has remained high this year strengthens the case for caution at the ECB,” said Jack Allen-Reynolds at Capital Economics.

Diego Iscaro at S&P Global Market Intelligence said he expected the ECB to “keep interest rates unchanged when it meets later on this month”. He predicted it would still cut rates twice more this year in September and December, but added “this projection will come under question if core inflation does not ease over the coming months”.

Eurostat said energy inflation decelerated from 0.3 per cent in May to 0.2 per cent in June and unprocessed food prices cooled from 1.8 per cent in May to 1.4 per cent in June.

Core inflation, which excludes energy and food to offer a better picture of underlying price pressures, was unchanged at 2.9 per cent.

A string of major sporting and cultural events, combined with the start of the summer tourism season is expected to push up prices for many services in high demand in Europe, including hotel rooms and airline tickets.

ECB president Christine Lagarde said the bank would “take time” to gauge if inflation had been tamed because of high uncertainty about “how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks”.

“The strong labour market means that we can take time to gather new information, but we also need to be mindful of the fact that the growth outlook remains uncertain,” Lagarde said on Monday evening in a speech to open the ECB’s annual conference in Sintra, Portugal.

Unemployment in the Eurozone remained at its record low of 6.4 per cent in May, according to separate data published by Eurostat on Tuesday. The number of jobless people in the bloc increased by 38,000 to 11.1mn.

ECB policymakers have also been focused on the risk of political turmoil in France after Marine Le Pen’s far-right Rassemblement National won the first round of the country’s parliamentary election.

Investors have speculated that the ECB could be required to intervene by buying French bonds if the election result causes a major sell-off in financial markets. The run-off vote is on July 7.

But Luis de Guindos, vice-president of the ECB, sounded sanguine about the market reaction, saying it was not “disorderly” and mostly showed investors were reacting to potential shifts in fiscal policy.

“The situation has been under control,” he told Bloomberg TV on Tuesday.