Alarming Inflation Data in Europe

Preliminary Data on Eurozone Inflation in June

Preliminary data on inflation in the Eurozone for the month of June showed a slowing down of prices to 2.5%.
This news was expected and reassuring, however, it still hides some worrying details, especially for the assessments of the ECB.
A fundamental component of services has remained stubbornly high, possibly fueling concerns among some policymakers at the European Central Bank that internal price pressures could remain high.

Although the price of goods has remained contained for most of this year and even energy inflation has decreased, services have proven to be rigid, a phenomenon carefully monitored in Frankfurt and putting pressure on the Eurotower for future decisions.

Concerns about Underestimated Inflation

The core inflation rate, excluding volatile effects of energy, food, alcohol, and tobacco, stood at 2.9% compared to the previous month, narrowly missing the 2.8% expected by economists.
The rate of price increases in services also remained unchanged, standing at 4.1%.
The lack of decline in these inflationary components has raised concerns in the Eurozone.

Some argue that the services sector simply follows other components with a delay and that a moderation of prices is also coming in this area, favored by an economic recovery that should improve competitiveness.
Others, however, fear that labor shortages, rapid wage growth, and poor productivity indicators in services could consolidate rapid price growth, keeping overall inflation above the target for an extended period.

Unemployment Rate Stability and Uncertainty

In a possible sign that labor market stress will persist, data showed that unemployment in the euro area remained stable at a historic low of 6.4% in May.
The unemployment rate is now more than one percentage point lower than the pre-pandemic minimum, while employment is on the rise.
All these factors increase uncertainty about the ECB’s next moves.
Lagarde has made it clear that too many doubts still surround the potential path of inflation.
And, consequently, of interest rate cuts.