Annual inflation in the 21-nation Eurozone eased significantly to 2.8% in June from 3.2% in May. The latest report from Eurostat is well below the market consensus forecast of 3.0%, easing pressure on the European Central Bank (ECB) to raise borrowing costs this month.
This significant decline was driven by a simultaneous decline in the cost of key components that include the food, energy, and service industries. The core inflation indicator, which filters out volatile elements such as fuel and fresh food, also recorded a net decline from 2.6% to 2.4%.
Although the current consumer price forecast is still above the central bank's long-term median target of 2.0%, this easing is associated with a sharp drop in global crude oil prices following the US-Iran peace deal. This positive sentiment gives the ECB’s policy council breathing room to maintain its current policy rate without rushing.
Policymakers are suggesting that the ECB will likely take a wait-and-see approach at its next meeting on July 23, after raising rates by 25 basis points to 2.25% in June. The reason for this delay is reinforced by labor data that shows no increase in wage costs or the impact of a second round of inflation in the market.
However, the majority of economists predict that the ECB’s monetary tightening cycle will be reactivated around September or October. This is due to the projected high energy prices compared to the pre-war phase, in addition to the risk of a European heat wave and the issue of fertilizer shortages that could push food prices up again.
