Euro inflation is not coming down

Eurozone inflation to rise despite drop in Germany

Germany, Spain and Belgium published inflation data for June today. The flash estimate for the eurozone aggregate will follow on Friday 1 July. To begin with, Germany reported a decline in HICP inflation to 8.2% yoy, down from 8.7% in May. The detailed data from the various regions show that the decline in the inflation rate was primarily due to cuts in taxation on fuel and sharp reductions in the price of public transportation (some states reported drops in inflation in the category ‘transportation’ from around 17% to around 9%). The only other components that declined in June were clothing and shoes, which probably is related to shifts in discount sales. The inflation rates of the rest of the components in Germany’s HICP all increased in June. Indeed, almost all regions reported a sharp jump in the inflation rate of food products (to around 13% in June, up from around 11% in May), leisure and entertainment (e.g. package holidays) and non-energy industrial goods such as household appliances. In contrast to the decline of inflation in Germany, Spain and Belgium reported sharp rises in inflation in June. In Spain HICP inflation jumped to 10.0% yoy, up from 8.5% in May and in Belgium non-harmonised CPI inflation increased to 9.7% from 9.0%. Spain’s statistics bureau mentioned that the rise in inflation occurred mainly in fuel, food, hotels, cafés and restaurants. Spain’s core inflation rate according to the non-harmonised CPI measure increased by 0.6 percentage points to 5.5% in June. Similarly, Belgium’s statistics bureau mentioned that the main factor behind the rise in inflation was higher food price inflation, whereas energy price inflation edged slightly lower. The core rate according the Belgium’s definition and flash estimate increased to 5.1% in June up from 4.4% in May. The big picture that emerges from these reports is that, barring government induced tax and price cuts, eurozone inflation increased in June. We have pencilled in a rise to 8.4% in June, up from 8.1% in May (consensus forecast is 8.5%). Looking ahead, recent changes in global food commodity prices indicate that food price inflation has peaked and will decline in the coming months. Energy price inflation, in contrast, will probably remain elevated and close to current levels for a while. On top of that, services price inflation probably will continue to be lifted by normalisation of holiday and leisure prices as well as the pass-through of high food and energy prices into, for instance, transportation services and restaurant and catering services. Meanwhile, supply chain disruptions and high energy prices also still are lifting non-energy industrial goods price inflation. All in all, we expect eurozone inflation to remain close to current levels in the next few months and to start falling in the Autumn. Please read more about our scenario for growth and inflation in the eurozone in our Global Monthly (see here).