Eurozone CPI falls again to 2.5%, but ECB fails to speed up rate cuts
Disinflation returned to the eurozone in June. The consumer price index (CPI) slowed again last month after rising in May. The headline figure rose from 2.6% year-on-year in the previous month to 2.5%, as expected, but still above the 2.4% in March and April and still far from the ECB’s 2% target. The news is worse on core inflation (which excludes energy, food, alcohol and tobacco). The measure, more resilient in recent years and more under the control of the central bank, remains stuck at 2.9% year-on-year (it had been expected to slow by a tenth), a level that is still too high to claim victory in the fight against inflation. The very slow process of inflation control shown by these data suggests that the ECB will not rush to cut rates, although a return to the path of deflation could lead to more dovish statements from officials, who forecast further rate cuts in 2024. The results, published by Eurostat this Tuesday, will not help the central bank to cut rates again in July (meeting on the 18th) after its actions in June and continue to leave doubts about whether there will be another cut in September.
Within the categories that make up this eurozone shopping basket, attention has once again turned to services, the epicentre of last year’s inflation, which continues to please us. In June consumer price index for services This was again 4.1% year-on-year. This is the highest level since October, after 3.7% in April, which is explained by the fact that this year Holy Week was celebrated in March rather than April as is usually the case (the comparison base, which was April last year, was higher, giving softer data for April this year). Excluding April, the services measure has remained above 4% since September 2022. With companies more exposed to rising labor costs and consumer demand growing, this part of the economy is key to whether the disinflation path can be considered sustainable.
The positive side: inflation fresh food In June, it fell from 1.8% year-on-year to 1.4%. Similarly, energy rose 0.2% from 0.3% in May. long shelf life products The same 0.7% growth was recorded as in the previous month. processed foods, alcohol and tobacco In May, they also maintained growth of 2.8% year-on-year.
“It already looked unlikely that the ECB would cut interest rates at its July meeting, and the June inflation data will reinforce the appetite for caution among policymakers,” said Jack Allen in a quick commentary after the data – Reynolds, analyst at Capital Economics. “The fact that service sector inflation, which is most sensitive to domestic economic conditions, has remained elevated this year. ECB steps up prudence“he adds.
“Inflation has resumed its decline after a temporary pause in May and will continue to decline as inflationary pressures ease due to slower wage growth, lower energy prices and normalization of price expectations. But the persistence of core inflation reminds us that inflation has resumed its decline after a temporary pause in May. the disinflationary process will be bumpy– notes Riccardo Marcelli Fabiani, senior economist at Oxford Economics. – Despite the decline in headline inflation, persistent inflation in the services sector will cause headaches for the ECB. This, together with its hawkish bias and concerns about rigid wage growth, suggests that there will be no rate cut at the July meeting,” analysts at Capital Economics agree.
The ECB still does not have sufficient evidence that the threat of inflation has passed, as its president said in recent hours, in the middle of a forum the central bank is hosting in Sintra, Portugal, Christine Lagardeand its chief economist, fueling expectations that policymakers will take a pause in cutting interest rates this month. Given the euro zone’s robust labor market, the ECB has time to assess incoming information, Lagarde said Monday at the opening of the ECB’s annual forum.
Speaking from there on Bloomberg TV on Tuesday, the chief economist Philip Lane said what is inflation reading June will not be enough to fully assess the prices of servicesunder close scrutiny of the inflationary pressures they exude. “We still face some uncertainties about future inflation, particularly in terms of how the inflation rate will evolve. The Relationship Between Profits, Wages and Productivity“We will need time to collect enough data to be sure that the risks of inflation above the target level have passed.”
The rest of the statements by the Government Council members followed a similar line, assuming almost certainly that there will be no cut in July, but opening the door to at least one more rate cut in 2024, leaving September as the great unknown. “Expectations of two more cuts this year coincide with my own thoughts if the data develops as expected,” the Lithuanian said. Gediminas Simkus“The first two rate cuts are relatively easy as long as inflation is around 2.5%, because we will continue to have clearly restrictive measures,” the Belgian said. Pierre Wunsch.
“If the actual result turns out to be close to our latest forecasts, then we will most likely be able to further reduce the level of political restrictions this year,” the Estonian said. Madis Muller“If everything develops as expected, we will be able to continue lowering interest rates this year, but I would not like to tie it to any date, it depends on the data we receive,” the Slovenian decided. Bostjan Vasle.
According to analysts at Commerzbank, the market should not underestimate the power of the doves. “At the end of May and beginning of June, financial markets were only forecasting one further interest rate cut before the end of 2024. However, expectations have now been adjusted, and markets are forecasting approx. two interest rate cuts before year-end. Growing concerns about France are likely to have been the reason for this change in attitude. However, despite this, we caution against underestimating the influence and reasoning power of the moderate members of the ECB Governing Council. We therefore maintain our view that, looking ahead, the ECB will cut interest rates twice by the end of this year, and in March 2025” writes economist Marco Wagner.
As a result, the deposit rate will remain at 3%. However, it is quite possible that margin exhausted to further cut interest rates. “We think that will be the case because by then it should be increasingly clear that inflation is actually more resilient than expected. By then, even the more moderates will not be able to argue for further cuts in interest rates,” Wagner says.