Euro area’s core inflation slows down in June, likely to decline further in months ahead

Euro area’s underlying inflation continued to decline in the month of June. The core inflation rate, which excludes the volatile prices for energy, food, alcohol and tobacco, dropped to 0.8 percent. A further fall to 0.6 percent in July is expected because of the reduction of the German VAT, said Commerzbank in a research report. The headline inflation rate rose to 0.3 percent in June because of significantly higher energy prices.

At present, inflation is influenced by two opposing factors. On the one hand, supply bottlenecks caused by broken supply chains are resulting in rising prices of individual goods. On the other hand, soft demand is reducing firms’ scope for pricing. In all, the latter impact is currently dominating.

Therefore, the core inflation rate eased to 0.8 percent in June. In February, it had still remained at 1.2 percent. The inflation rate of industrial goods excluding energy stayed at 0.2 percent. Services were just 1.2 percent more expensive in comparison with the prior year. In May, the pace had still been 1.3 percent. Nevertheless, the figures are still subject to some uncertainty.

According to Commerzbank, the core inflation rate is likely to continue to fall in months ahead. The VAT rates in Germany will fall by 2 and 3 percentage points, respectively, in July. This alone is expected to impact the core inflation rate in the euro area by 0.2 percentage points in July. Meanwhile, in view of the slump in employment, wages, which determine the prices of services in particular, are not expected to rise in the year as a whole. And lastly, in view of the uncertain employment outlook, demand from private households is expected to remain weak. Therefore, businesses are likely to continue to find it difficult to hike prices in the market, added Commerzbank.