By Ed Frankl
Cooling energy prices helped push eurozone inflation lower in June, increasing the likelihood that the European Central Bank will hold rates steady later this month after raising them at its last meeting.
Inflation in the 21-nation currency area fell to 2.8% from 3.2% in May, the first decline since January, the European Union's statistics agency Eurostat said Wednesday. A consensus of economists polled late last week by The Wall Street Journal expected consumer-price growth at 3.0%.
Energy prices were 1.7% cheaper in June than in May, the data showed, as oil prices declined throughout the month after tensions in the Middle East eased. Annual services inflation also cooled, suggesting that recently higher energy costs aren't passing through significantly into other areas of the economy that could push up wages. Core inflation--which strips out more volatile energy and food prices--fell back to 2.4% in June from 2.6% in May.
"Inflation in the eurozone is falling--and falling significantly," Stephanie Schoenwald, an economist at KfW Research said. "Provided the situation in the Middle East remains stable, the peak of the energy-driven price surge is now behind us."
The print suggests the ECB won't rush into another rate hike, allowing policymakers to wait for fresh macroeconomic forecasts at its meeting in September, when the impact of the Iran war on supply infrastructure could become clearer. The bank raised its key rate by a quarter-point to 2.25% in June.
"The data cements the now-consensus view that the ECB will hold fire this month," Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said in a note to clients.
"It would take a remarkable rally in oil prices to convince the governing council later this month that the outlook has shifted...sufficiently to justify a hike," he added.
Nevertheless, ECB rate setters have in recent weeks been balancing the discomfort of inflation still above the bank's 2% target alongside signs that the impact of the surge in energy prices is softening. Oil prices in the last week returned to prewar levels, after the tentative deal announced between the U.S. and Iran to halt fighting. Investors still expect at least one more rate hike before the end of the year, according to LSEG data.
At the ECB's forum in Sintra, Portugal, on Monday, President Christine Lagarde reiterated that the bank's rate rise at its meeting last month was based on forecasts that put inflation above target until 2028, rather than a pre-emptive "insurance hike."
However, she contended that the central bank need not now "act with the same force" after the dramatic increases in energy prices in 2022-23 after Russia's full-scale invasion of Ukraine. The ECB eventually raised rates to record highs to try to bring inflation under control.
Write to Ed Frankl at edward.frankl@wsj.com