DAVY VIEW

June’s flash inflation reading was 3.3% in annual terms, above our forecast of 3.1% but still a moderation from 3.5% in May and 3.6% in the previous two months. Energy prices declined less than we expected, but food prices were also negative. However, core inflation accelerated as a result of seasonally strong price growth for services. Looking ahead, while inflation could rise higher towards the autumn months, a return towards 2% core inflation by next summer is achievable. While further European Central Bank (ECB) deposit rate hikes are still priced in for September or October, lower energy prices could render the recent 25bp increase sufficient to restore euro area inflation to target next year.