Inflation tumbled in June: where did prices cool the most in Europe?

As Europe swelters through one of the most brutal heatwaves on record, the latest inflation figures have offered a rare bit of cooler news.

Price growth across the eurozone slowed sharply in June, according to Eurostat's flash estimate, a welcome sign that the spike unleashed by the conflict in the Middle East may be running out of steam.

Annual inflation in the currency bloc dropped to 2.8%, down from 3.2% in May, the highest reading since September 2023.

It also came in below the 3.0% that economists had expected. Over the month itself, prices actually fell by 0.1%, the first monthly fall this year after a run of increases.

There was better news underneath the headline, too.

The core rate, which leaves out volatile energy and food prices, slipped to 2.4% from 2.6%. That figure matters more to the ECB than the headline number, because it gives a cleaner read on whether inflation is getting stuck.

Energy remained the single largest source of inflation, running at 8.7% year on year. Even that is cooling quickly, though: the rate stood at 10.8% in May.

The surge in oil and gas prices that followed the outbreak of the war has started to reverse since the ceasefire between the US and Iran and the reopening of the Strait of Hormuz.

Services inflation came down to 3.2% from 3.5%, food, alcohol and tobacco slowed to 1.6% from 1.9%, and industrial goods excluding energy held steady at 0.9%.

Malta had the lowest annual rate in the bloc at 1.9%, just ahead of France and Estonia, both at 2.0%.

Germany (2.4%) and Finland (2.7%) also sat comfortably below the eurozone average of 2.8%.

The picture looked very different further east.

Lithuania topped the table at 5.5%, followed by Bulgaria, which only joined the euro in January, at 5.3%. Croatia and Cyprus were not far behind, at 4.2% and 4.0%, respectively.

On a monthly basis, prices actually fell in several countries between May and June.

They dropped by 0.4% in Belgium, Bulgaria, Estonia and Luxembourg, and by 0.3% in France, Austria and Finland.

The steepest monthly rises came the other way: prices jumped by 1.0% in Malta and by 0.8% in Cyprus, with Spain and Lithuania both up by 0.6%.

Every one of the eurozone's largest members reported cooler inflation.

In Germany, the harmonised rate used to compare EU countries fell to 2.4% from 2.7%, undershooting forecasts.

The national measure eased to 2.3%, well down from the 2.9% recorded in April, which had been its highest level in more than two years.

Behind the move was a collapse in energy inflation, which more than halved to 3.4% from 6.6%, while core inflation held at 2.5%.

France saw an even sharper drop. Its harmonised rate fell to 2.0% from 2.8%, and the national measure came in at 1.8%, the lowest level in over a year.

Once again, energy did most of the work, with fuel inflation slowing to 11.2% from 16.6%. French prices fell 0.2% over the month, their first drop since January.

Italy was the outlier among the big four, with its harmonised rate barely moving, easing to 3.1% from 3.2%.

The reason lies in household energy bills. Italian electricity and gas tariffs lag the wholesale market, so they kept climbing even as petrol at the pump began to get cheaper.

Regulated energy prices climbed to 9.3% year on year in June, from 5.6% in May, with regulated electricity alone jumping to 7.1% from 2.3%. On the free market, the moves were bigger still: electricity rose to 12.6% from 8.4%, and gas to 9.9% from 8.2%.

Joe Nellis, economic adviser at the accountancy and advisory firm MHA, said June's figures were a snapshot of two forces pulling in opposite directions.

The war in the Middle East has pushed up energy, transport and production costs. At the same time, businesses are wary of investing, and households are spending carefully, so there is simply not enough momentum in the economy to drive prices up quickly.

"Put simply, the Eurozone economy is not generating enough momentum to drive prices higher at any great pace," he said.

Nellis expects the pressure to keep easing.

Wage growth has hovered around 3%, energy markets are settling down, and the truce between the US and Iran has lowered the risk of another oil shock.

The ECB raised rates in June, he points out, but "there is no need to panic".

He thinks one more hike this year, to 2.5%, is possible, though anything more aggressive looks unlikely while the economy stays soft.

"With the economy weak and inflation appearing manageable, the ECB will be wary of adopting a significantly more restrictive monetary policy stance," he added.

The euro slipped below $1.14 as the case for further rate rises weakened.

The Euro STOXX 50 was flat for the day, held back by its banks, which tend to earn more when rates are high.

The Euro STOXX Banks index lost around 0.7%, with BNP Paribas down 1.2% and Société Générale off 0.8%.

All of which leaves the ECB with a far easier call when its Governing Council meets in July.

Having lifted borrowing costs only last month, it now has every reason to sit back and wait.