As much of Europe endures a severe heatwave—linked to over 4,000 excess deaths across Western Europe—the latest inflation data offers a rare reprieve. Eurostat's flash estimate shows annual inflation in the eurozone dropped to 2.8% in June, down from 3.2% in May and below the 3.0% economists had predicted. On a monthly basis, prices actually fell by 0.1%, the first monthly decline this year.
The core inflation rate, which strips out volatile energy and food prices, slipped to 2.4% from 2.6%. This measure is closely watched by the European Central Bank (ECB) as it provides a clearer signal of underlying price pressures. The decline suggests that the inflationary spike triggered by the conflict in the Middle East may be losing momentum.
Energy Still Dominates, but Cooling Fast
Energy remains the largest contributor to inflation, running at 8.7% year-on-year, though that is down sharply from 10.8% in May. The easing reflects a reversal in oil and gas prices following the ceasefire between the US and Iran and the reopening of the Strait of Hormuz. Other categories also softened: services inflation fell to 3.2% from 3.5%, food, alcohol and tobacco slowed to 1.6% from 1.9%, and industrial goods excluding energy held steady at 0.9%.
Wide Disparities Across Member States
Inflation rates varied significantly across the bloc. Malta recorded the lowest annual rate at 1.9%, followed by France and Estonia, both at 2.0%. Germany (2.4%) and Finland (2.7%) also sat comfortably below the eurozone average. At the other end, Lithuania topped the table at 5.5%, with Bulgaria—which joined the euro in January—at 5.3%, and Croatia and Cyprus at 4.2% and 4.0%, respectively.
On a monthly basis, prices fell in several countries between May and June: by 0.4% in Belgium, Bulgaria, Estonia and Luxembourg, and by 0.3% in France, Austria and Finland. The steepest monthly increases were in Malta (1.0%), Cyprus (0.8%), and Spain and Lithuania (both 0.6%).
Big Economies All Slow, Italy an Outlier
All of the eurozone's largest economies reported cooler inflation. Germany's harmonised rate fell to 2.4% from 2.7%, undershooting forecasts, driven by a collapse in energy inflation which more than halved to 3.4%. France saw an even sharper drop, with its harmonised rate falling to 2.0% from 2.8%, and the national measure hitting 1.8%, its lowest in over a year. French prices fell 0.2% over the month, their first drop since January.
Italy was the exception among the big four. Its harmonised rate barely moved, easing to 3.1% from 3.2%. The reason lies in household energy bills: Italian electricity and gas tariffs lag the wholesale market, so they kept climbing even as petrol prices fell. Regulated energy prices rose to 9.3% year-on-year in June, from 5.6% in May, with regulated electricity alone jumping to 7.1% from 2.3%.
Weak Economy Keeps Inflation in Check
Joe Nellis, economic adviser at MHA, described June's figures as a snapshot of two opposing forces. The Middle East conflict has pushed up energy, transport and production costs, but businesses are wary of investing and households are spending cautiously. "Put simply, the Eurozone economy is not generating enough momentum to drive prices higher at any great pace," he said.
Nellis expects pressure to continue easing. Wage growth has hovered around 3%, energy markets are settling, and the US-Iran truce has lowered the risk of another oil shock. He noted that the ECB raised rates in June but sees "no need to panic." He believes one more hike this year, to 2.5%, is possible, but anything more aggressive looks unlikely while the economy remains soft.
Markets Bet on ECB Pause
Traders drew similar conclusions. The euro slipped below $1.14 as the case for further rate rises weakened. The Euro STOXX 50 was flat, held back by its banks, which tend to benefit from higher rates. The Euro STOXX Banks index lost around 0.7%, with BNP Paribas down 1.2% and Société Générale off 0.8%.
With inflation easing and the economy weak, the ECB's Governing Council faces a straightforward decision at its July meeting. Having raised borrowing costs only last month, it now has every reason to pause and assess the impact.
