Inflation cools in biggest euro economies, easing rate hike urgency

]PARIS] Inflation slowed more than expected across most major euro zone economies in June, preliminary data showed on Tuesday (Jun 30), easing pressure on the European Central Bank to raise interest rates in the near term.

Germany, France and Italy all reported softer-than-expected readings, while Spain was the only large economy where inflation did not ease. The figures increase the likelihood that overall euro zone inflation, due on Wednesday, could undershoot expectations.

Economists polled by Reuters have forecast the bloc’s inflation at 3 per cent for June.

“Upside risks to inflation have declined markedly,” said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics. While expectations remain elevated and energy prices could rise again, “there is no pressing need for the ECB to raise interest rates further,” he said.

A sharp drop in energy prices in recent days has also reduced pressure on ECB policymakers ahead of their July meeting. However, the case for a modest rate hike later remains intact, four sources told Reuters.

Undershooting expectations

In Europe’s biggest economy, German inflation slowed to 2.4 per cent in June from 2.7 per cent the previous month, below the 2.5 per cent forecast in a Reuters poll. Core inflation held steady at 2.5 per cent, suggesting energy costs have yet to spill over more broadly.

French inflation fell more sharply, dropping to 2 per cent from 2.8 per cent in May, in line with the ECB’s target and well below expectations of 2.3 per cent.

The drop was mainly due to a 5 per cent decrease in energy prices, services price inflation eased to less than 2 per cent while prices for manufactured goods fell 0.9 per cent.

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Inflation also eased in Italy, dipping to 3.1 per cent from 3.2 per cent in May and defying forecasts for no change.

Spain was the exception among big euro zone economies with June inflation running at 3.6 per cent, unchanged from May but above expectations for 3.4 per cent. REUTERS