The latest data suggest that underlying inflationary pressures in the euro-zone remain intense. Although core inflation edged down from 3.8% in May to 3.7% in June, this appeared to be down to temporary policy changes in Germany that will weigh on services inflation there for the next three months. Assuming those policies are not extended, German core inflation will jump in September. Meanwhile, on a range of measures, such as our own underlying inflation indicator, core inflation is historically high. We expect it to remain strong for a number of reasons, including the likely strength of wage settlements against the backdrop of a tight labour market, prolonged disruption to supply chains and the spillover of high energy prices into core inflation. Even as the ECB raises interest rates, we expect core inflation to remain above the Bank’s 2% target over the next few years, averaging 4% in 2023 and 3% in 2024.
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