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Eurozone inflation fell to 2.5 percent in June, but policymakers remain concerned about strong increases in services prices, which are partly offsetting weaker growth in energy and fresh food prices.
The figure for the year to June marked a slowdown from 2.6 percent in the previous month. It was in line with economists’ forecast of 2.5 percent in a Reuters poll.
After accelerating in May, the slowing price increases in the 20 eurozone countries are providing some relief for the European Central Bank. Last month, the European Central Bank began cutting interest rates in the expectation that inflation will reach its 2 percent target next year.
But ratemakers will still be concerned about persistently high inflation in the services sector. Price growth in the sector was 4.1 percent in the year to June, equal to a seven-month high reached in May, according to data published by the EU statistics office on Tuesday.
Economists said the figures made it likely the ECB would keep the deposit rate at 3.75 percent at its next meeting on July 18. Further cuts in borrowing costs could also depend on how quickly inflation in the services sector falls.
“The fact that inflation in the services sector, which is most sensitive to domestic economic conditions, has remained elevated this year reinforces the need for caution at the ECB,” said Jack Allen-Reynolds of Capital Economics.
Diego Iscaro of S&P Global Market Intelligence said he expects the ECB “to leave rates unchanged when it meets later this month.” He predicted the ECB would cut rates twice more this year, in September and December, but added that “this forecast will be called into question if core inflation does not ease in the coming months.”
According to Eurostat, energy inflation fell from 0.3 percent in May to 0.2 percent in June and unprocessed food prices fell from 1.8 percent in May to 1.4 percent in June.
Core inflation, which excludes energy and food to give a better picture of underlying price pressures, remained unchanged at 2.9 percent.
A series of major sporting and cultural events, combined with the start of the summer tourist season, are expected to push up prices for many services in high demand in Europe, including hotel rooms and air tickets.
ECB President Christine Lagarde said the bank “will need time” to assess whether inflation is under control, given the high level of uncertainty about “how the relationship between profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks”.
“The strong labour market means we can take time to gather new information, but we must also bear in mind that the growth outlook remains uncertain,” Lagarde said in a speech on Monday evening at the opening of the ECB’s annual conference in Sintra, Portugal.
Eurozone unemployment remained at a record low of 6.4 percent in May, according to separate data published by Eurostat on Tuesday. The number of unemployed in the bloc rose by 38,000 to 11.1 million.
ECB policymakers are also focused on the risk of political unrest in France after Marine Le Pen’s far-right Rassemblement National won the first round of the country’s parliamentary elections.
Investors speculated that the ECB could be forced to intervene by buying French bonds if the election results trigger a major sell-off in financial markets. The second round of voting is on July 7.
But ECB Vice President Luis de Guindos sounded optimistic about the market reaction, saying it was not “disorderly” and showed that investors were responding to potential shifts in fiscal policy.
“The situation is under control,” he told Bloomberg TV on Tuesday.