Eurozone inflation eased to 2.5% in June but remains above where the European Central Bank would prefer, and the bank remains cautious about cutting interest rates further after earlier, more cautious cuts.
While Tuesday's figure was down from 2.6% in May, it is good news as inflation continues to fall from a peak of 10.6% that sapped consumers' purchasing power and plunged Europe's economies into near-zero growth for months.
But headline indicators remain at levels that suggest inflation may remain stuck at 2% to 3% for the time being. Services price inflation was unchanged from the previous month at 4.1%.
The ECB's cautious stance to ensure inflation is under control comes as the U.S. Federal Reserve refrains from cutting interest rates from their current high levels. The central bank does not want to reverse course only to realize too late that inflation is more persistent than expected. Such a mistake would make it harder to squeeze inflation out of the economy and would also undermine the central bank's credibility.
Higher interest rates are intended to keep inflation down by making it more expensive to borrow money to buy goods and invest in new factory capacity. That eases price pressures, but can also slow growth. The ECB and Fed are walking a tightrope between ensuring inflation is kept down without plunging the economy into recession.
Core inflation, a closely watched measure that excludes volatile energy, food, alcohol and tobacco prices and is a key gauge for the central bank, remained steady at 2.9% in June after experts had expected it to fall to 2.8%.
European Central Bank (ECB) President Christine Lagarde said in a speech on Monday that the bank must first ensure that inflation is well under control before lowering interest rates again, after first cutting them by a quarter of a percentage point at its June 6 meeting to the current 3.75%.
“Our work is not done yet. We need to remain vigilant,” Lagarde warned in a speech at the European Central Bank's Sintra meeting in Portugal.
“We will not rest until we win the game and get inflation back to 2 percent,” she added.
“It will take time to gather enough data to be confident that the risk of above-target inflation has passed.”
Lagarde said euro zone growth was uncertain but the job market remained strong with low unemployment — a sign the economy was holding up even as interest rates rose much higher than before.
Still, rising interest rates are holding back credit-sensitive sectors such as real estate and construction. Mortgage rates for buying a home have risen, ending years of growth in euro zone house prices. But savers are feeling liberated from a previous period of zero interest rates when some banks charged negative rates on deposits, meaning they charged savers a fee for keeping their money.
Lagarde said the first rate cut in June would only “ease the level of restrictions” on the economy and not be the start of a series of rapid rate cuts. She said decisions would be made based on incoming data at each meeting.
Analysts say a rate cut is unlikely at the central bank's July 18 meeting and that discussions on interest rates will remain focused on the central bank's September meeting.
Experts said Tuesday's data would likely reinforce the ECB's cautious stance.
“The ECB is already unlikely to cut rates at its July meeting and the June inflation data will likely encourage policymakers to tread very cautiously,” said Jack Allen Reynolds of Capital Economics, a London-based consultancy.
The European economy has struggled with near-zero quarterly growth, rising just 0.3% in the first three months of the year, and recent indicators such as S&P Global's Purchasing Managers' Index have shown that factory activity in the euro zone is shrinking.
High energy prices have caused inflation, robbing consumers of purchasing power and slowing the European economy, but consumers are finally regaining that power through new labor agreements and wage increases.
Energy prices soared after Russia all but cut off natural gas supplies during its full-scale invasion of Ukraine, spreading to other goods and services, from medical bills and concert tickets to haircuts and restaurant bills.
According to Eurostat, energy price growth slowed to 0.2 percent in June from 0.3 percent in May.
Price increases for food, alcohol and tobacco also eased slightly to 2.5% last month, down from 2.6% in May.
Across the eurozone, Finland had the lowest inflation rate in June, at 0.6%, according to Eurostat data. Italy was second with 0.9% inflation in June.
Belgium had the highest rate at 5.5%.
With inflation stabilising, the ECB revised its forecast for 2025 in June.
The bank said it expects euro zone inflation to hit 2.2% next year before falling to 1.9% in 2026.
