Euro zone inflation eased last month but inflation in the key services sector remains elevated, raising concerns among some European Central Bank policymakers that domestic price pressures could remain elevated.
Consumer price inflation in the 20-nation euro zone slowed to 2.5% in June from 2.6% in June, in line with expectations in a Reuters poll of economists, helped by slower increases in the prices of energy and unprocessed foods.
The ECB has previously expected inflation to remain on either side of that level for the rest of the year, but economists are scrutinizing underlying price trends to see whether the ECB can actually cut inflation to its 2 percent target next year.
The much-talked-about core inflation rate remained steady at 2.9%, beating the expected 2.8%, mainly due to a continued 4.1% increase in services prices.
These figures are unlikely to give the ECB any clarity on the direction of prices, and ECB President Christine Lagarde has already said more time is needed to gain certainty, so there will be no rush to ease policy further.
Commodity prices have been sluggish and energy inflation has fallen for much of the year, but the services sector has proven resilient, a phenomenon that has divided opinion among ECB policymakers.
Some believe that the development of the services sector will only follow other sectors with a lag, and that the economic recovery will also ease this and make it more competitive.
But some worry that labour shortages, rapid wage growth and weak service sector productivity measures could allow rapid price increases to take hold and push overall inflation above the target for a long period of time.
In a sign that labor market strains may continue, data on Tuesday showed the euro zone's unemployment rate plateaued at a record low of 6.4% in May. The rate is now more than 1% below its pre-pandemic low, while hiring is rising.
The ECB cut interest rates in early June in recognition of the sharp rise in deflation, but did not specify what further steps it might take, saying it was not yet convinced that inflation was moving towards its target.
Still, policymakers seem to agree that the next step will be a rate cut, and the only question is the timing. Many argue that July is too early for a cut, but September is arguable, especially if wage and price developments data support the ECB's forecasts.
