Guntermann at Commerzbank notes that while Oil prices near pre-war levels reduce tail risks for growth, inflation and rate volatility, Euro area inflation is not falling fast enough to dispel European Central Bank (ECB) hawkishness. Lower June headline readings in Spain and Belgium may signal a first post-war drop in Euro area HICP, with headline seen at 3.0% and core at 2.5%.

First post-war HICP decline eyed

"Inflation and the weather have something in common these days. The hottest spell is probably over, but the trends remain unstable, and it will be some time before the situation stabilises at comfortable levels."

"Although oil prices near pre-war levels reduce tail risks for economic growth, inflation and rates volatility, inflation is probably not coming down quickly enough to dispel the ECB hawkishness. The coming days will provide reality checks on all counts, also given several ceasefire breaches in the Middle East."

"Oil prices will be in focus at the start of the week, and upticks could overcast the message from national consumer price reports. Today, lower headline inflation in Spain and Belgium for June could foreshadow similar trends in Germany tomorrow and the euro area HICP on Wednesday. As this would be the first drop since the war began, it could support the notion that the peak in inflation is now behind."

"Recently lower oil should be the key driver, with energy costs likely to lead €-headline inflation down from 3.2% to 3.0%. While we also expect core inflation to slip back below the rounding threshold to 2.5%, the outlook is less clear-cut, and also the ECB continues to emphasise that price pressure for services keeps building up."

"ECB: Schnabel says peace deal makes negative scenarios less likely, but "energy price shock can feed into broader inflationary dynamics", and "food, goods and service inflation are facing upside risks"."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)