Eurozone's underlying inflation accelerated more than previously reported in June, strengthening the case for an expected interest-rate increase by the European Central Bank (ECB) next week. Eurostat announced on Wednesday that core consumer prices, which exclude volatile elements like food and energy, rose by 5.5% year-on-year, in contrast to the initial estimate of 5.4% and a reading of 5.3% in May. Meanwhile, the headline inflation rate remained at 5.5%, the lowest level since the Russian invasion of Ukraine. Economists surveyed by Bloomberg predict that underlying price growth will surpass the overall figure by the end of 2024.
With headline inflation having nearly halved since reaching its peak of 10.6% in October, policymakers have shifted their focus to the narrower measure, which has proven to be more persistent. While the upward revision in the core inflation figure may provide support for those in favor of continuing rate hikes into the autumn, some officials have recently adopted a more cautious stance. Dutch central bank chief Klaas Knot stated on Tuesday that core inflation appears to have reached a plateau and emphasized that any further action beyond July is not assured but remains a possibility. ECB Vice President Luis de Guindos also expressed optimism earlier, suggesting that underlying inflation may be peaking.
Communication will be crucial for the ECB following its July meeting, with Bloomberg reporting that striking the right tone in telegraphing future intentions will be the biggest challenge for the Governing Council. The central bank will need to carefully consider its messaging to effectively communicate their stance on inflation and monetary policy. While some members of the ECB have shown signs of hawkishness, others have expressed a more cautious approach, acknowledging the potential for a slowdown in underlying inflation.
The ECB's decision to focus on underlying inflation reflects its intention to ensure price stability and maintain control over inflationary pressures. The gradual decline in headline inflation over the past several months has provided room for policymakers to shift their attention to core inflation, which has proven to be more resistant to downward pressures.
The upcoming interest-rate decision by the ECB is highly anticipated, with markets expecting a rate increase. However, the central bank will need to carefully consider the economic landscape and the potential impact of monetary tightening amid concerns of a slowdown in global growth and potential risks posed by trade tensions. The ECB's task will be to strike a balance between managing inflationary pressures and supporting economic stability.
Overall, the upward revision in eurozone's core inflation figures reinforces expectations of a looming interest-rate increase by the ECB. However, policymakers will face the challenge of effectively communicating their stance on future monetary policy decisions amidst mixed signals regarding the outlook for underlying inflation.