The Eurozone has experienced a surge in core inflation, indicating that the single currency bloc continues to face persistent price pressures.
The core rate, which excludes food and fuel costs, reached 5.4% in June, an increment from 5.3% in May, primarily driven by the increasing cost of services.
While economists observed a deceleration in core inflation momentum, Nomura, the financial services company, warned of a “considerable risk” that it would not stabilize at the European Central Bank’s (ECB) target of 2%, thus bringing up the possibility of further hikes in interest rates.
The risk, according to Nomura, arises from “significant wage hikes”, as evidenced by a 5.2% year-on-year increase in employee compensation for the first quarter of 2023.
Jack Allen-Reynolds of Capital Economics stated, “Nothing in this data release would dissuade the ECB from considering another 25 basis point increase in interest rates at the July meeting”. He also suggested that “another hike” is likely in September.
Despite the rise in core inflation, headline inflation dipped from 6.1% to 5.5%, marking the lowest level since the Ukrainian conflict began.
Following an interest rate hike to the highest level since 2001, the ECB revised its inflation predictions earlier this month. It now anticipates inflation across the Eurozone to hit 5.4% in 2023, followed by 3% in 2024 and 2.2% in 2025.
ECB president, Christine Lagarde, remarked that inflation has been “too high for too long” and cautioned that it is expected to “persist” into 2024.
On Tuesday, she stated, “While we don’t see a wage-price spiral or de-anchoring of expectations currently, the longer inflation exceeds the target, the higher the risk”.
She emphasised the need to return inflation to the 2% medium-term target promptly.
