30-6-2023 (BRUSSELS) Preliminary Eurozone inflation data showed a decline to 5.5% in June, coming in lower than expected by analysts. However, core inflation, which excludes energy and food, remained stubbornly high and rose to 5.4%, despite easing to 5.3% in May from 5.6% in April. The headlining inflation rate is at its lowest point since January 2022, though still significantly above the European Central Bank’s (ECB) 2% target.
The lower inflation figure is largely attributed to falling energy prices, while the sticky core rate is reportedly due to an increase in German rail ticket costs and concerns about persistent wage growth. The ECB hiked interest rates to their highest level in 22 years on June 15, moving the benchmark rate 25 basis points higher to 3.5%, out of step with the U.S. Federal Reserve, which paused hikes at its last meeting.
The inflation figures will be closely monitored by the ECB, which revised its headline and core inflation expectations for the next couple of years during its interest rate meeting. It now anticipates inflation reaching an average of 5.4% this year, 3% in 2024, and 2.2% in 2025. ECB President Christine Lagarde, speaking before the latest figures, emphasised that inflation was still too high and that it was too early to declare victory over consumer price rises.
Clémence Dachicourt, Senior Portfolio Manager at Morningstar Investment Management Europe, noted that while inflation is heading in the right direction, a “wage-price spiral” remains a burden for core inflation, which could lead to negative inflationary surprises. The ECB’s long-term target remains in focus as it seeks to navigate the uncertain path towards a sustainable inflation rate.
