The high-level breakdown provided by Eurostat came largely in line with our expectations, with an unchanged headline print the result of an uptick in core inflation offset by another drop in food, alcohol and tobacco (FAT) annual prices.
June core inflation edged up in line with our above-consensus forecast to 0.8% y/y from 0.7% y/y in May, mainly as a result of services (+0.2pp to 1.3% y/y). Meanwhile, FAT prices declined further by 0.3pp to -0.2% y/y. As we expected, NEIG and energy prices remained broadly unchanged (Figures 1 and 2).
All in all, today’s release came largely in line with our expectations. We continue to believe that euro area inflation will remain at these levels until the end of the year. Our baseline even envisages a drop to 0.4% y/y over the summer.
We project euro area inflation to average 0.5% this year before edging up very gradually next year to an average 0.8%. Nonetheless, we remain vigilant about the possibility of higher oil prices related to geopolitical tensions, which could push headline prices higher.