France and Germany report sharp inflation slowdown in June, bolstering bets on ECB rate pause

Inflation readings

Consumer price growth in the eurozone’s two largest economies cooled more sharply than expected in June. France’s annual inflation fell to 1.8% from 2.4% in May, a preliminary estimate from the national statistics agency Insee showed. Prices actually dipped 0.2% month-on-month after a 0.1% rise in May. Germany’s harmonised rate eased to 2.3% from 2.6%, according to Destatis. Portugal also recorded a modest deceleration, to 3.2% from 3.3%.

Drivers: energy and food

The brakes on inflation came mainly from energy, especially petroleum products. Insee pointed to “the strong deceleration in energy prices, particularly oil products” following the June 17 Middle East peace protocol. French energy prices still posted an 11.2% annual gain, down from 16.6% in May. German energy inflation slowed to 3.4% in June from 10.1% in April, though Destatis provided no May break-out. Services and food also contributed. In France, services inflation eased to 1.8% from 2.4%, food to 0.9% from 1.1%, and fresh products to 2.8% from 3.4%. Tobacco prices were nearly stable at 3.3% after 3.2% in May.

With the easing in the Middle East, the inflationary shock is also fading. But the situation in the Persian Gulf remains fragile and the gas price has not followed the sharp drop in the oil price.

Policy implications

The better-than-expected figures reinforce market expectations that the ECB can pause its rate-hiking cycle. French and German inflation are now closing in on the central bank’s 2% target, which had been out of reach since the Iran war sent energy costs spiralling in March. Analysts noted that the ECB’s next meeting would likely see rates held steady.

Broader picture

The preliminary French data will be confirmed on July 10. Harmonised inflation for France, which allows comparison across the euro area, stood at 2.0% in June, down from 2.8% in May. Across the region, the energy-price relief is giving consumers breathing space, though the KfW economist warned that gas markets remain tight and the geopolitical calm is fragile. Portugal’s tick down to 3.2% from 3.3% mirrored the wider trend, with its statistics institute also citing energy-price deceleration.