Euro Area Inflation Rate

The consumer price index rose 1.4% year-on-year in June, slower than May's 1.6% increase, final data from Eurostat showed. That confirmed a preliminary figure released on June 30. A year earlier, inflation was negative 0.1%. The European Central Bank targets inflation rates of 'below, but close to, 2%' over the medium term.

On a monthly basis, the consumer price index, or CPI, was flat in June. The core CPI that excludes energy, food, alcohol and tobacco rose 0.9% year-on-year following a 0.8% rise in May.

Eurozone inflation could increase somewhat further in subsequent months, as energy and food price inflation temporarily move higher, ING Bank NV economist Martin van Vliet said. But with core inflation set to slow further and to remain low thereafter, the outlook is still for below-target inflation in the medium term. Consequently, ECB rate hikes remain a distant prospect, the economist added.

The ECB has been retaining the key interest rate at a historic low since the middle of 2009. The last change in the rate was in May 2009, when the bank cut the rate by 25 basis points to the current level of 1%.

Detailed data showed that alcohol and tobacco prices rose 3.7% annually in June, followed by a 3.9% increase in transport cost. Miscellaneous expenses climbed 2.2%. Price falls were observed in communications and recreation and culture. Inflation slowed in all four major Eurozone economies.

Following the announcement of the interest rate decision earlier last week, ECB President Jean-Claude Trichet had said inflationary pressures over the medium term remain contained. Hence, the current ECB interest rates are appropriate, he noted.

"We expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households," Trichet had said adding that the firm anchoring of inflation expectations remains of the essence.

The retreat in Eurozone consumer price inflation in June reinforces belief that any interest rate hike by the ECB is a long way off, IHS Global Insight's economist Howard Archer noted. As such, the economist expects the central bank to keep interest rates down at the current level of 1% not only through 2010, but deep into 2011.

The statistical office also said the EU annual inflation eased to 1.9% in June from 2% in May. A year earlier, the rate was 0.6%. Among the member states for which data were available, the lowest annual rates were observed in Ireland, Latvia and the Netherlands. Meanwhile, Greece, Hungary and Romania recorded highest rates.