Inflation across the 20 countries sharing the euro currency fell to 5.5 percent in June from 6.1 percent in May, beating economists’ forecast of 5.6 percent in a Reuters poll.
The pace of price increases slowed in 18 of the countries. It rose in Germany and remained flat in Croatia.
For the first time in more than a year, inflation slowed below the European Central Bank’s 2-percent target in Belgium, Luxembourg, and Spain.
Energy prices dropped 5.6 percent last month, accelerating from a 1.8-percent decline in May. Food, beverages, and tobacco costs slowed their growth to 12.5 percent. Cost increases for industry eased back to 5.5 percent.
However, core inflation—which excludes energy and food prices—edged up last month to 5.4 percent from 5.3 in May, indicating inflation remains broadly embedded in the zone’s economy.
Inflation in service prices ran at an annual rate of 5.4 percent, a record for the region. A significant portion of the increase came from Germany’s increase in bus and train fares.
“The core rate will remain sticky over the summer, but all other components are on a clear softening trend,” Melanie Debono, an analyst at Pantheon Macroeconomics, said to the Financial Times.
Core inflation’s stubbornness will keep the European Central Bank (ECB) on track to raise its key interest rate again this month, analysts predicted.
“There is nothing in this [new information] that would deter the ECB from raising interest rates another [quarter point]” at its meeting this month, economist Jack Allen-Reynolds at Capital Economics, told the FT, adding there is “a good chance” that the bank will do the same again in September.
TREND FORECAST: With core inflation still almost three times the ECB’s 2-percent target rate, the central bank will raise rates this month. Unless the zone falls into recession this quarter, the bank is more likely than not to raise its rate again in September.
Each rate hike raises the odds of a near-term recession for the Eurozone. China, one of Europe’s top two trading partners, already is flailing economically. If Europe enters a recession, that will drag China’s GDP down even further—and if Europe and China are both on the ropes, the U.S. would be hard-pressed to escape a recession, especially as the Fed keeps raising interest rates and consumers continue to buy less stuff.