Eurozone inflation eases, putting worst case scenarios on hold
The inflation rate fell from 3.2% to 2.8% in June. Is the inflation shock over before it really got going? With much lower oil prices and a sluggish economy, inflation risks are easing.
The drop in June was in part related to oil price declines, which are starting to translate into lower prices at the pump. Energy inflation fell from 10.8% to 8.7% in June. And because gasoline prices respond more slowly to the oil price on the decline than during an increase, this probably means that at current oil price levels, there is still more downward pressure on energy inflation for consumers to come in July.
Then again, the question is whether current favourable oil price levels can persist. As the Dutch and Germans found out at the World Cup, temporary excitement can quickly turn to misery if the underlying fundamentals remain shaky. But even at somewhat higher prices, it seems that worst-case scenarios have become less likely.
Core inflation also fell in June, from 2.6% to 2.4%. And with businesses having seen input costs increase, core inflation will likely increase further before it starts to ease again. But with oil prices lower, it will become harder to price through higher costs to consumers.
Survey data on pricing intentions in industry and services already revealed easing ahead of the deal. Both the PMI and European Commission sentiment survey indicated a softening of selling price expectations in June. And with the economy remaining sluggish for the moment and wage growth not showing immediate signs of increase, the breeding ground for broadening inflation may not be as fertile as previously thought.
For the ECB – currently on its annual off-site in Sintra, Portugal – the outlook seems to be turning more dovish. President Christine Lagarde opened the conference by saying the ECB doesn’t need to be as forceful as it was in 2022 to fight inflation. But the question is whether it needs to be forceful at all to do so. At this rate, it seems not. But with uncertainty around the Middle East deal remaining, the ECB will appreciate some time to see how things play out and whether any force is still necessary.
Author
Bert Colijn
ING Economic and Financial Analysis
Bert Colijn is a Senior Eurozone Economist at ING. He joined the firm in July 2015 and covers the global economy with a specific focus on the Eurozone.
