Eurozone inflation reappears in June

Inflation unexpectedly returned to the eurozone in June after a negative trend that stretched across three of the four prior month.

An initial estimate from Eurostat, the statistical office of the European Union, on Thursday indicated the headline harmonised (HICP) rate for the consumer price index (CPI) had risen 0.1% compared to the same month last year.

This was an increase from the deflation of 0.1% in May and better than the consensus forecast for a flat reading.

Energy inflation increased to -6.5% from -8.1% as expected after the increase in oil prices.

Core CPI, which excludes energy and other volatile prices such as food, showed a 0.9% increase from the 0.8% last month and expectations for a repeat.

The main driver was services inflation, which rose to +1.1% from +1.0% to counteract a fall in goods inflation to +0.4% from from +0.5%.

"June’s rise in euro-zone CPI inflation into positive territory might mark the start of an upward trend, but we see little hope of inflation hitting the ECB’s target over the medium term," said Jennifer McKeown at Capital Economics.

She added that unless oil prices drop back sharply, headline CPI will climb further over the coming months, which could boost the headline rate by around 1.5 percentage points by early 2017.

"Uncertainty over the effects of Brexit could add to downward pressure on wage growth and increase firms’ reluctance to raise their prices in the coming months," she said. "Accordingly, we still think that the ECB will need to do more if it is to hit its inflation target of near 2% on a sustained basis."

Tom Floyd, sales forex trader at Foenix Partners, noted that the data print was a boost to European Central Bank Governor Mario Draghi but that the bloc is currently concentrating on more prominent issues, while also lifting the single currency.

"With the central bank focusing monetary policy tools on boosting growth and inflation, today’s numbers will be taken well and are understandably giving the euro a small lift.

"However, in the context of a European state facing risks of contagion from the Brexit vote, highlighted by plunging equity markets, it is unlikely Draghi will be giving the data much credence. As supporting the financial system with sufficient liquidity is likely to remain the key priority, for now, primary data releases remain of secondary importance."