Eurozone inflation drops to 2.8% in June, beating forecasts

Consumer prices across the euro zone rose at a slower pace than expected in June, with annual inflation falling to 2.8% from 3.2% in May, according to a flash estimate published on Tuesday by Eurostat Euronext N.V.. The reading came in below the 3.0% median forecast from economists, marking the first deceleration in headline inflation since January and offering a reprieve after months of energy-driven price surges tied to the U.S.-Iran war.indexbox

Energy costs, the primary driver of the inflationary spike that began in the spring, rose 8.7% year-over-year in June, down from 10.8% in May. Services inflation also eased to 3.2% from 3.5%, while food, alcohol, and tobacco prices slowed to 1.6% from 1.9%.indexbox

National Readings Signal Broad-Based Cooling

Data released earlier in the week from the euro zone's three largest economies had already pointed to a sharper-than-expected retreat. In Germany, harmonized consumer price growth slowed to 2.4% from 2.7% in May, according to Destatis, below the 2.5% forecast. French inflation fell to 2.0% from 2.8%, undershooting expectations of 2.3%, while Italy's rate cooled to 3.0% from 3.2%, also below the consensus estimate of 3.2%.destatis+1

The slowdown follows a pronounced drop in oil prices after the announcement of a framework peace deal between the United States and Iran on June 14, which raised hopes for a reopening of the Strait of Hormuz. By late June, Brent crude had briefly fallen below pre-war levels, according to the BBC.bbc+1

What It Means for the ECB

The data complicates the outlook for the European Central Bank, which on June 11 raised its key deposit rate by 25 basis points to 2.25% — its first hike in nearly three years — citing war-driven inflation pressures. Markets had been pricing in as many as two additional hikes by year-end.global.morningstar+1

Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, said Tuesday's inflation figures "will undermine" the case for a second rate hike, adding that if oil and gas prices remain near current levels, headline inflation could fall to roughly 2.5% in July. The ECB's next policy meeting is scheduled for July 23.indexbox+1

Still, uncertainty lingers. Despite the tentative peace deal, full normalization of energy flows through the Strait of Hormuz could take months, and ECB policymakers have said they will take a "data-dependent, meeting-by-meeting approach" to future rate decisions.dukascopy+1