Euro Area Inflation | Europe: Less Than Feared

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Euro Area Inflation | Europe: Less Than Feared

UpdateMItaly (16% of euro area HICP) | Headline down on core and food: Headline HICP

inflation came in at 3.1%Y in June, in line with our forecast and 10bp below

consensus. Italy remains an interesting case study, as the flash release provides an

almost complete breakdown of the inflation basket. Food inflation was 10bp weaker

than we had anticipated, reinforcing the pattern seen across other euro area

countries of softer-than-expected food price developments. Energy inflation rose to

12.6%Y from 12.0%Y in May. While fuel prices corrected lower in response to the

recent decline in oil prices, and utility prices were broadly flat on the month, the

small monthly decline in energy prices was not sufficient to offset base effects,

resulting in a higher annual rate of energy inflation in June. Core goods inflation

remained broadly unchanged at 0.5%Y, from 0.6%Y in May. Meanwhile, services

inflation eased to 2.5%Y from 2.7%Y the previous month, slightly below our

forecast, driving core inflation down to 1.8%Y from 2.0%. The moderation in services

inflation was led by entertainment, hotels and restaurants, and airfares. In particular,

airfares recorded the weakest June monthly print in the recent history of the series,

rising by just 0.9%M compared with the much stronger seasonal increases seen in

previous years. This may partly reflect the exceptionally high level of Italian airfares,

which increased on average by more than 85% above 2019 levels in 2025, compared

with an increase of only 39% for the euro area as a whole. Given these elevated

price levels, more moderate increases in Italian airfares appear justified and could

continue to keep transport services inflation contained over the remainder of 2026.