8jc2awlyiommji2xkdc11dnk_media_dl_2.png Eurostat

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(Bloomberg) — Euro-area inflation eased more than anticipated as efforts toward peace in the Middle East sent global oil prices lower.

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Consumer prices rose 2.8% from a year ago in June, down from 3.2% the previous month, Eurostat said Wednesday. That’s less than the 3% median estimate in a Bloomberg survey.

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Core inflation, which excludes volatile items like food and energy, also dipped more than expected, while the closely watched services gauge sank to 3.2%.

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Money markets continue to see a greater than 50% chance that the European Central Bank will raise interest rates by a quarter-point by September, with a full hike almost priced by year-end. German bonds pared their declines to leave 10-year yields two basis points higher at 2.88% compared to an earlier peak at 2.90%. 

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The ECB is weighing whether last month’s increase in interest rates, its first since 2023, will be enough to contain the inflationary forces unleashed by the US’s war with Iran.

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June data had already revealed slower-than-expected advances in consumer prices in the euro zone’s three top economies, with France’s reading even plunging back to the ECB’s 2% target.

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Policymakers urge caution, however, warning that the knock-on effects of higher oil and natural gas costs as fighting broke out will take time to be felt. Chief Economist Philip Lane said Tuesday that the ECB must look at how the energy-cost increases that occurred in recent months “percolate into food inflation and into services inflation.”

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What Bloomberg Economics Says:

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“Inflation has surprised to the downside and lower oil prices, if sustained, suggest price increases peaked in May. We think the case for an additional hike has been weakened. While the tone of President Lagarde’s recent speeches suggests she still supports a rate hike in September, that would in all likelihood mark the end of this short tightening cycle.”

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—David Powell, senior euro-area economist. Click here for full REACT

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Bundesbank President Joachim Nagel was similarly circumspect, telling Bloomberg Television earlier that despite being surprised by the pullback in oil, it remains to be seen how the fragile situation in the Middle East pans out.

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“I will keep optionalities open for the July and September meetings,” he said in Sintra, Portugal, where the ECB is holding its annual forum. “It’s still an open race.”

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While markets are more sure that more monetary tightening is on the way, they’ve curbed bets on more aggressive action as the cooling on energy markets steered the ECB away from some of the more extreme scenarios it had mapped out for Europe’s economy.

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—With assistance from Harumi Ichikura, Joel Rinneby, James Hirai and Barbara Sladkowska.

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(Adds Bloomberg Economics.)

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