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Eurozone inflation slowed to 2.5% in June, but policymakers will remain concerned by strong increases in services prices that are partly offsetting slower growth in energy and fresh food prices.
The figure for the year to June slowed from 2.6 percent in the previous month and was in line with the 2.5 percent forecast by economists in a Reuters poll.
Inflation in the 20-nation euro zone accelerated in May but has since slowed, providing some relief to the European Central Bank, which began cutting interest rates last month on expectations that inflation would reach its 2 percent target by next year.
But rate-setters will still be concerned about high services inflation: Eurostat data released on Tuesday showed prices in the services sector rose 4.1% in the 12 months to June, matching the seven-month high hit in May.
Economists said the figures made it likely the ECB would keep its benchmark deposit rate unchanged at 3.75% when it next meets on July 18, with any further cuts in borrowing costs depending on how quickly services inflation fell.
“The fact that services inflation, which is most sensitive to domestic economic conditions, has remained elevated this year strengthens the case for the ECB to be cautious,” said Jack Allen Reynolds of Capital Economics.
Diego Iscaro of S&P Global Market Intelligence said he expects the ECB to “keep rates on hold when it meets later this month.” He predicted the ECB would cut rates two more times this year, in September and December, but added that “this forecast would be called into question if core inflation does not moderate in the coming months.”
Eurostat said energy inflation slowed to 0.2 percent in June from 0.3 percent in May, while unprocessed food prices fell to 1.4 percent in June from 1.8 percent in May.
Core inflation, which excludes energy and food to more accurately represent underlying price pressures, was unchanged at 2.9%.
A series of major sporting and cultural events and the start of the summer tourist season are expected to drive up prices for many services in high demand in Europe, such as hotel rooms and flights.
European Central Bank President Christine Lagarde said she would “take time” to determine whether inflation was subdued, 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 a new supply-side shock.”
“The strength of the labour market allows us time to gather new information, but we also need to be mindful that the growth outlook remains uncertain,” Lagarde said in her opening speech at the European Central Bank's annual meeting in Sintra, Portugal, on Monday night.
Separate data from Eurostat released on Tuesday showed the euro zone's unemployment rate remained at a record low of 6.4 percent in May, as the number of unemployed people in the bloc rose by 38,000 to 11.1 million.
ECB policymakers are also focusing on the risk of political turmoil in France after Marine Le Pen's far-right National Rally party won the first round of French parliamentary elections.
Investors have speculated that the ECB may have to step in by buying French government bonds if the election results trigger a major sell-off in financial markets. The runoff election is set for July 7.
However, European Central Bank (ECB) Vice-President Luis de Guindos expressed optimism about the market reaction, saying it was not “disorderly” and showed investors were reacting to a potential shift in fiscal policy.
“The situation is under control,” he told Bloomberg TV on Tuesday.
