Eurozone Inflation Drops As Energy Prices Fall

Annual inflation in the euro area is expected to be 5.5% in June 2023, down from 6.1% in May, as energy prices tumbled by 5.6% from a year earlier, a flash estimate from Eurostat, the statistical office of the European Union, showed on Friday.

Energy is the only main component to see an annual drop in prices, per Eurostat’s estimates.  

Despite the expected lower inflation in June compared to May, core inflation – excluding energy and food – is estimated at an annual 6.8% in June, only marginally down from 6.9% in May.

The stubbornly high core inflation suggests that the European Central Bank (ECB) will have to continue raising key interest rates. Another concern for ECB policymakers would be the very different inflation readings among the euro area members, from 1.6% expected inflation in Belgium in June, to 11.3% in Slovakia, analysts say.  

Due to continued high inflation, Germany—Europe’s biggest economy—has entered a recession, with GDP contracting by 0.3% in the first quarter of 2023 and by 0.5% in Q4 2022, government data showed at the end of May.  

Germany’s central bank, the Bundesbank, said this week that the recession in the country is expected to end in the second quarter with a slight rise in GDP between April and June.

Updated figures for Germany and Ireland from Eurostat showed in early June that the Eurozone also slipped into recession, with GDP contracting by 0.1% in the first quarter of 2023 after a 0.1% contraction in Q4 2022.

Meanwhile, the ECB will continue raising interest rates amid the high inflation. 

“We have made significant progress but – faced with a more persistent inflation process – we cannot waver, and we cannot declare victory yet,” ECB President Christine Lagarde said at the ECB Forum on Central Banking 2023 this week.

This month, the ECB raised the key interest rates to the highest in more than two decades, as “Inflation has been coming down but is projected to remain too high for too long.”

By Charles Kennedy for Oilprice.com

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