Drop in inflation rate not a liberating blow

The inflation rate in the euro area fell slightly to 2.5% in June.

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Dr Vincent Stamer

Commerzbank Economic Research

July 2 2024

This partially offsets the surprising rise in May. The core rate remains unchanged at 2.9% – mainly due to the sharp rise in service prices. The inflation rate is likely to fall further until September, giving the ECB the opportunity to cut interest rates again. However, due to the high underlying inflation, the inflation rate is likely to rise again by the end of the year.

According to preliminary data from Eurostat, the inflation rate fell from 2.6% in May to 2.5% in June – in line with the consensus. However, this only partially reverses the surprising rise in the previous month. In May, the previous year's rate had risen contrary to market expectations due to service prices.

Prices for energy, as well as food, alcohol and tobacco contributed to the decline in June, with the previous year's rates falling slightly. In the case of food, this is due to the fact that a strong monthly figure in the previous year was excluded from the comparison. The previous year's rate for goods excluding energy remained at 0.7%. However, due to the lower year-on-year rates for these components, their month-on-month changes only play a minor role in the overall change in inflation.

The core rate remains constant

The inflation rate excluding energy, food and beverages remained constant at 2.9% in June and, contrary to expectations, did not fall. The core rate also surprisingly rose to 2.9% in May after falling for a long time. This increase in May was also due to strong underlying price inflation. This upward pressure on prices is particularly evident in services. As these are especially labor-intensive, the recent high wage settlements have had a particularly strong impact on them. The previous year's rate for goods excluding energy and food is approaching zero. However, prices for goods are also likely to rise again in the medium term. This is suggested by purchasing manager surveys for input prices in industry and rising transportation costs worldwide.

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