Eurozone Core Inflation Re-Accelerates, Reinforcing ECB’s Determination to Raise Rates in July
Eurozone core inflation experienced a setback in June, which may strengthen the European Central Bank’s (ECB) resolve to raise interest rates next month. The measure of underlying consumer-price gains, excluding fuel and food, reached 5.4%, slightly below economists’ median estimate. This increase was primarily driven by a significant rise in the cost of services.
While core inflation worsened, there was an improvement in the headline inflation gauge, which moderated to 5.5% from 6.1%. This was the lowest level since before the war in Ukraine began, largely due to falling energy costs. The release of this data coincided with the upcoming release of US Federal Reserve’s preferred price metrics for May, which are expected to remain elevated.
The ECB’s anti-inflation and rate-hiking campaign will soon reach its one-year mark. ECB vice president Luis de Guindos stated that a rate increase in July is inevitable, while the possibility of a move in September remains uncertain. Bloomberg Intelligence senior economist Maeva Cousin believes that the core reading will remain elevated in the coming months due to base effects and statistical distortions, indicating that the ECB will continue hiking rates until at least September. However, if signs of easing price gains in services emerge, it could provide ammunition for those advocating for a pause after the July meeting.
ECB President Christine Lagarde emphasized the need to bring inflation back to the 2% medium-term target in a timely manner. Recent national data from across the eurozone showed that Spanish inflation is below the ECB’s target of 2%, while France, Italy, and the Netherlands experienced a retreat, although still above the goal. Irish inflation fell to 4.8% in June from 5.4% in May. In contrast, German consumer-price growth accelerated to 6.8%, largely due to a heavily discounted public-transport ticket offered by the government to mitigate surging energy costs.
German Chancellor Olaf Scholz, speaking at the European Union summit in Brussels, highlighted his government’s efforts to diversify energy supplies away from Russia as a contributing factor to dampening inflation. He emphasized the importance of maintaining price stability for citizens. These concerns have become more prominent following a historic tightening campaign that has seen a 400 basis point increase in borrowing costs.
Officials at the ECB’s annual retreat in Sintra, Portugal, reiterated their focus on underlying inflation, stating that a slowdown must occur before pausing rate increases. Another hike beyond July would bring the ECB’s deposit rate to 4%. Additionally, officials have stated that once borrowing costs reach their peak, they will remain at that level for an extended period to address consumer price pressures.