Eurozone inflation drops below 2% in ‘temporary’ dip

Economists expect prices to rise in the second half of the year as the recovery takes hold

Berlin, Germany. Shops have reopened across the eurozone as the bloc's economic recovery gathers pace. Reuters

Eurozone inflation slowed to below 2 per cent in June, easing concerns that the bloc’s economic reopening will fuel price growth.

However, economists expect pressures to increase again in the second half of the year.

Consumer prices rose by 1.9 per cent in June from a year earlier, down from a more than two-year high of 2 per cent in May.

Core inflation, a less volatile measure that excludes volatile items such as food and energy, slowed to 0.9 per cent, according to a flash reading from Eurostat.

“Looking at the main components of euro-area inflation, energy is expected to have the highest annual rate in June [12.5 per cent, compared with 13.1 per cent in May], followed by non-energy industrial goods [1.2 per cent, compared with 0.7 per cent in May],” Eurostat said on Wednesday.

Europe’s recovery is gaining momentum as the number of Covid-19 infections declines, with shops, restaurants and cafes reopening and summer travel resuming.

“National data shows that the decline in eurozone inflation was largely because of a fall in Germany, from 2.4 per cent in May to 2.1 per cent in June, which was in turn due to services inflation declining from 2.2 per cent to 1.6 per cent,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“We don’t yet have much detail for Germany either, but the fall in services inflation may reflect changes in the timing of holidays and is, in any case, unlikely to be the start of a downward trend.”

Among the other large economies, headline inflation in June was either stable, such as in Spain, or slightly higher, such as in France and Italy.

But economists expect upward pressure on prices to return in the summer when the recovery will be at full speed, led by higher inflation in Germany.

“We think it will drop back at the beginning of 2022 and remain below the European Central Bank’s target beyond that,” said Mr Kenningham.

The majority of ECB policymakers say the price pick-up is temporary, with high unemployment and a weak medium-term outlook justifying their loose monetary stimulus. The institution has pledged to keep buying bonds at an elevated pace over the summer.

Joshua Mahony, senior market analyst at global online trader IG, said the decline in eurozone consumer price inflation should provide some relief for markets, given the impact it could have upon ECB thinking.

However, European stocks were “on the back foot” in early trading on Wednesday.

“On a day dominated by economic data, eurozone inflation has provided a welcome sign of easing pressure on the central banks. While the 0.1 per cent decline in inflation may be marginal in nature, this represents the end of a five-month period of consecutive price growth that swung CPI from minus 0.3 per cent to 2 per cent,” said Mr Mahoney.

“Coming at a time where we have seen a focus on central bank thinking in response to above-target inflation, the fact that eurozone CPI is back below the 1.9 per cent target should ensure a relatively dovish stance from the ECB.”