France Italy inflation at 2% and 3% miss forecasts, easing ECB urgency

French and Italian inflation cooled more than expected in June as energy prices tumbled after the US-Iran peace deal, reducing pressure on the European Central Bank to deliver additional rate hikes.

"The need for another rate increase has diminished compared with June," Pierre Wunsch, European Central Bank governing council member and Belgian central bank governor, said Tuesday.

France's EU-harmonized CPI slowed to 2.0% from 2.8% in May, below the 2.3% median estimate in a Bloomberg survey. Italy's rate fell to 3.0% from 3.2%, also missing expectations for an unchanged reading. In both countries, the deceleration was led by petroleum product prices, national statistics agencies said.

The data reduces the probability of a second consecutive rate increase when the ECB meets in September, though policymakers remain wary of still-elevated core inflation at 2.5% in May. Markets now price roughly 25 basis points of additional tightening this year, down from expectations of a more aggressive path before the inflation prints. Eurozone-wide June CPI data due Wednesday will provide the next catalyst for rate expectations.

Energy Disinflation Spreads Across the Eurozone

Spain's June CPI also came in above expectations, with electricity and natural gas prices still providing support, highlighting the uneven nature of the disinflation process. The divergence reflects different energy mix exposures: France's heavy reliance on nuclear power buffers it from gas price swings, while Italy and Spain are more exposed to wholesale electricity markets tied to natural gas.

The US-Iran interim peace agreement reached in mid-June removed a key risk premium from crude prices, with Brent crude falling to its lowest level since before the conflict escalated. That relief is now flowing through to consumer prices with a lag, particularly in fuel-dependent transport and heating categories. German 10-year bund yields fell 4 basis points to 2.45% after the data, while the euro weakened 0.3% against the dollar to $1.0820, reflecting the reduced rate hike premium.

ECB Faces Data-Dependent Crossroads

ECB President Christine Lagarde reiterated Tuesday that the June rate increase — the first in almost three years — was based on the central bank's latest projections, which show inflation remaining above the 2% target through 2028 without further tightening. The ECB raised its deposit rate by 25 basis points to 3.75% in June.

Wunsch said he would not commit to a July move but would favor acting quickly if data warranted it. "If the data show we need to raise rates again, I prefer to do it sooner rather than later," he said. The ECB's next policy decision is scheduled for July 23, followed by the September meeting where updated staff projections will be available.

Core inflation, which strips out volatile energy and food prices, unexpectedly accelerated to 2.5% in May, suggesting that energy-driven disinflation may not be sufficient to bring headline inflation sustainably to target. Services inflation, closely watched by policymakers for second-round effects, remains sticky above 3%.

This article is for informational purposes only and does not constitute investment advice.