Key measure of eurozone inflation turns negative

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There was more encouraging news today for eurozone policymakers battling to restrain inflation, even as new survey data highlighted pressures on the bloc’s services sector.

Growth in producer prices, which tend to foreshadow patterns in consumer inflation, turned negative in May for the first time since 2020. The bigger than expected drop of 1.5 per cent, driven by a 13.3 per cent fall in energy prices, will be welcomed by the European Central Bank as a sign that its programme of increasing interest rates is bearing fruit. It follows last week’s news of eurozone CPI falling more than expected to 5.5 per cent in June. 

Consumer expectations, which help shape wage and price decisions, are also moving in the right direction. New ECB survey data today showed median expectations for inflation for the next year falling to 3.9 per cent — the lowest since the start of Russia’s war in Ukraine. Andrzej Szczepaniak, an economist at Nomura, described the news as “exactly what the ECB will have been looking for”.

There is still a way to go. CPI is still well above the ECB’s 2 per cent target and core consumer prices remain elevated. High interest rates are also hurting the housing market: separate official data today showed eurozone house prices falling for the second quarter in a row — the first two consecutive contractions in almost a decade.

A cooling of price pressures in the eurozone was also highlighted in new PMI survey data for the services sector in June. Input costs remained high but fell to a 25-month low, with businesses moderating price rises in response. The sector is still fragile, with growth slowing for a second month, although job creation remained solid. The slowdown in momentum was most noticeable in France, hit by pension reform protests and strikes, alongside tougher financing conditions and weaker demand.

The highlight of today’s batch of PMI readings however was China, where slower than expected services activity reinforced concerns around the strength of the country’s recovery, dragging down stocks in Asia and Europe. 

In the UK, momentum was at its weakest in three months as growth in new orders slowed, although job creation was robust. Input cost inflation eased to its lowest level since May 2021, while survey respondents noted that business and consumer spending remained resilient.

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Need to know: Global economy

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