Eurozone: Examining Data Around Inflation

■ Current prices remain above the inflation target, making a September rate hike by the ECB highly likely.  
■ However, wage and inflation expectations have slowed, and whether to continue raising rates after September will depend on the situation in the Middle East. 
 
The ECB Governing Council, meeting on the 22nd and 23rd, unanimously decided to leave the policy rate unchanged, but some participants noted reasons to raise rates at this meeting, indicating that the ECB remains highly vigilant about inflation. Observing the current inflation trend, the June Eurozone Consumer Price Index (HICP, revised value) shows that the growth rates of both the overall index (up 2.8% year-on-year) and the core index (up 2.4% year-on-year, excluding energy, food, alcohol, and tobacco) have slowed. Energy prices have peaked and fallen, and so far, the secondary transmission effect of energy price increases has been limited. However, inflation remains firmly above the 2% target. If we observe inflation momentum from the seasonally adjusted series published by the ECB (calculated as the 3-month moving average of the 3-month year-on-year annual rate), both core inflation (up 2.7%) and service inflation (up 3.2%) remain at high levels. Inflationary pressures were already present before the Middle East conflict, making a rate hike by the ECB at its September meeting highly likely. 
 
To understand the future direction of inflation, let's examine the ECB surveys released last week. In the June Consumer Expectations Survey (CES), extreme expectations of a sharp rise in inflation have weakened. Household inflation expectations one year from now (median) fell 0.5 percentage points to 3.0%; three years from now fell 0.1 percentage points to 2.8%; and five years from now remained unchanged at 2.4%. The dispersion of expectations has also narrowed. While the median remains above 2%, it indicates a gradual slowdown in the future. In the Business Finance Conditions Survey (SAFE), price and wage-related expectations also cooled in June. The input cost outlook, excluding labor costs, is 5.2% (down 0.6 percentage points from three months ago), still 1.6 percentage points higher than before the Middle East conflict, remaining at a high level. However, sales prices are subdued, at only 3.2% (down 0.3 percentage points from three months ago), just 0.3 percentage points higher than before the conflict. Furthermore, wage expectations are 2.5% (down 0.3 percentage points from three months ago), lower than the pre-conflict 3.1%. The significant slowdown in wages related to service prices is noteworthy. The preliminary July HICP figure released on July 1st warrants attention to whether it deviates from this trend. 
 
In addition to the aforementioned inflation trends, if the impact of the ECB's two rate hikes is transmitted to the economy and prices, the fundamental inflation rate is likely to fall back towards the target. Therefore, we believe that after the September rate hike, it will remain unchanged in the short term. However, whether to continue raising rates after September will depend on the situation in the Middle East. If the situation in Iran escalates again and energy prices remain high, the possibility of further policy responses from the ECB will increase. The developments surrounding the end of the US-Iran conflict still require continued monitoring.