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Inflation in the euro zone slowed to 2.5 percent in June, but policymakers will remain concerned about a strong rise in services prices, partly offsetting weaker growth in energy and fresh food prices.
The figure for the year to June marked a slowdown from 2.6 percent in the previous month. That was in line with economists’ forecast of 2.5 percent in a Reuters poll.
After accelerating in May, slowing price growth in the 20 countries that share the euro will provide some relief for the European Central Bank, which last month began cutting interest rates on expectations that inflation will reach its 2 percent target by next year.
However, rate-setters will still be concerned about persistently high services inflation. According to data published by the EU statistics office on Tuesday, price growth in the sector reached 4.1 percent in the year to June, matching the seven-month high reached in May.
Economists said the data made the ECB likely to keep its key deposit rate at 3.75 percent at its next meeting on July 18, and further cuts in borrowing costs could depend on how quickly service inflation eases.
“The fact that services inflation, which is most sensitive to domestic economic conditions, has remained high this year reinforces the case for caution at the ECB,” said Jack Allen-Reynolds of Capital Economics.
Diego Iscaro of S&P Global Market Intelligence said he expected the ECB to “keep interest rates unchanged at its meeting later this month.” He predicted he would cut rates twice more in September and December this year, but added that “this projection will be called into question if core inflation does not ease in the coming months.”
Eurostat said energy inflation slowed from 0.3 percent in May to 0.2 percent in June and unprocessed food prices cooled to 1.4 percent in June from 1.8 percent in May.
Core inflation, which excludes energy and food to give a better picture of underlying price pressures, was unchanged at 2.9 percent.
A number of major sporting and cultural events, combined with the start of the summer tourist season, are expected to increase prices for many services in high demand in Europe, including hotel rooms and airline tickets.
ECB President Christine Lagarde said the bank “will take time” to gauge whether inflation has been tamed due to high uncertainty, “how the nexus of profits, wages and productivity will develop and whether new supply-side shocks will hit the economy”. .
“A strong labor market means we can take time to gather new information, but we must also be aware that the growth outlook remains uncertain,” Lagarde said in a speech at the opening of the ECB’s annual conference in Sintra on Monday night. , Portugal.
Eurozone unemployment remained at a record low of 6.4 percent in May, according to separate data released by Eurostat on Tuesday. The number of people without work in the block increased by 38 thousand to 11.1 million.
ECB policymakers also focused on the risk of political unrest in France after the far-right Rassemblement National Marine Le Pen won the first round of parliamentary elections there.
Investors speculated that the ECB could be asked to step in by buying French bonds if the election result causes a big sell-off in financial markets. The second round of voting is on July 7.
But Luis de Guindos, the ECB’s vice-president, sounded upbeat about the market’s response, saying it was not “messy” and mostly showed investors were reacting to potential shifts in fiscal policy.
“The situation is under control,” he told Bloomberg TV on Tuesday.