Strong service sector means no relief over eurozone inflation in June

Underlying inflation in the eurozone accelerated in June, with fresh evidence that labor-intensive services are now the biggest headache for the European Central Bank.

While monthly headline inflation dropped to 5.5 percent from 6.1 percent in May, core inflation, which excludes volatile food and energy prices, rose to 5.4 percent from 5.3 percent.

Prices for services, which form the largest part of the economy, rose 0.6 percent on the month. According to figures released on Friday by Eurostat, they were the only major component of the index that accelerated, but they did so by enough to completely offset slowing food inflation and absolute falls in energy prices.

Falling energy prices, which were down 5.6 percent on the year in June, have brought headline inflation down from a peak of 10.6 percent in November. Food price inflation, which peaked at over 15 percent in March, also remains a problem. Prices for food, alcohol and tobacco rose 0.4 percent and were up 11.7 percent from a year earlier in June, Eurostat said.

The numbers mean the ECB is likely to keep increasing interest rates over the summer, according to analyst Bert Colijn of ING Economics, who pointed to the recent hawkish messaging from rate-setters at this week’s gathering in Sintra.

“The message … is clear: There’s more work to be done,” said Colijn. “The ECB thinks it is more costly to do too little in terms of hikes than to do too much, which means that we expect the ECB to continue hiking in July and September.”