UBS Economics-European Economic Perspectives _Eurozone Higher energy to p...-116050780

ab20 June 2025Global ResearchEuropean Economic PerspectivesEurozone: Higher energy to push inflation up in JuneProgress in underlying inflation resumes in MayThe final Eurozone HICP inflation estimate for May (published on 18 June) confirmed the 0.3pp decline to 1.9% y/y with a 0.4pp decline in core inflation to 2.3% y/y. The measures of underlying inflation were encouraging, showing a decline after some stalling in April. However, it is important to keep in mind that inflation in May benefited from the dropping out of the Easter effect, which had pushed services inflation higher in April. All of the measures of underlying inflation - exclusion measures, domestic inflation, trimmed means, supercore and PCCI - moved lower in May (Fig. 1, 5 and 6). The monthly increase in (nsa) services inflation excluding travel-related items was weaker than in the last three years, suggesting that the decline in services inflation was not solely due to the unwinding of the Easter effect (Fig. 13). The sequential run-rate of seasonally adjusted services inflation eased, falling 0.1pp to 0.3% m/m swda with the annualised 3m/3m rate down 0.2pp to 3.9% y/y (Fig. 9 and 12). The breadth of inflation also narrowed, with the share of items seeing price increases above 2% falling to 50% from 54% in April (Fig. 7). Somewhat less encouraging was the unchanged level of the more wage-sensitive services and another tick-up in consumer inflation expectations (Fig. 14, 17, 18 and 21). As regards wages, the ECB's estimate of negotiated wages (including one-off payments) fell sharply to 2.4% y/y in Q1-25 from 4.1% y/y in Q4-24, largely driven by the material slowdown in German wage growth including one-offs, which has been very volatile since the start of the year. Looking ahead, our monthly tracker of Eurozone negotiated wages (excluding one-offs) points to wage growth at 4.6% in April, up from 4.3% in March, with strong wage growth in Germany (7.1% y/y in April) more than offsetting slowing wage growth in the rest of the region. Outlook for June: Headline +0.2pp to 2.1%, core +0.1pp to 2.4%We forecast June headline inflation (out on 1 July) to increase by 0.2pp to 2.1% y/y, with higher energy inflation (+1.1pp to -2.5% y/y) due to the recent spike in oil prices as the key driver. We also expect a 0.1pp increase in both food (to 3.3% y/y) and core inflation (to 2.4% y/y). Within core inflation, we expect services inflation to tick up 0.1pp to 3.3% y/y, while goods inflation is likely to remain unchanged at 0.6% y/y. At the country level, we expect increases across the board. Specifically, we forecast inflation to rise by 0.2pp to 2.3% y/y in Germany, +0.1pp to 0.7% y/y in France, +0.1pp to 1.8% y/y in Italy, +0.3pp to 2.3% y/y in Spain and +0.1pp to 3% y/y in the Netherlands. ECB: We maintain our call for a final 25bps cut in JulyDespite the relatively hawkish ECB meeting on 5 June, we maintain our out of consensus call of a 25bps rate cut to a terminal rate of 1.75% in July