Eurozone annual inflation fell to 2.8% in June from 3.2% in May, according to Eurostat’s flash estimate, undershooting the 3.0% consensus forecast and ending a four-month sequence of accelerating price growth. Core inflation, which strips out energy and unprocessed food, eased to 2.2% from 2.3%, while the measure excluding energy, food, alcohol and tobacco dropped to 2.4% from 2.6%. The data, released on Wednesday, immediately shifted the near-term calculus for European Central Bank policy, reducing the urgency for further rate increases that markets had been pricing in after the ECB’s first hike in nearly three years.

The deceleration was powered chiefly by a retreat in energy costs. Energy inflation slowed to 8.7% year-on-year from 10.8% in May, as global oil prices fell back on signs of diplomatic progress in the Middle East conflict that had earlier closed the Strait of Hormuz and disrupted oil and gas supplies. The prior four months of rising headline inflation had been driven by that energy shock, which pushed the rate from near the ECB’s 2% target in February to 3.2% in May. With crude prices now returning to pre-conflict levels, the immediate pressure on consumer prices has abated, though analysts caution that the pass-through to food and services is still unfolding.

National figures underscored the uneven impact. France recorded inflation of exactly 2%, hitting the ECB’s target, while Germany saw 2.4%, down from 2.7%. Italy’s rate dipped to 3.1% from 3.2%, and Spain held steady at 3.6%. Speaking at the ECB’s annual symposium in Sintra, chief economist Philip Lane stressed that policymakers must evaluate how four months of elevated energy costs feed into food and services inflation. Bundesbank President Joachim Nagel warned that the energy price shock “is still present within the system.” Mark Haefele, chief investment officer at UBS Global Wealth Management, noted the ECB remains vigilant about the risk that the energy shock could still reverberate through consumer prices, despite diplomatic progress.

Markets continued to assign a greater than 50% probability to a quarter-point rate increase by September, though the June print has prompted a reassessment of the tightening cycle’s duration. The next milestone will be the evolution of energy prices and the ECB’s forthcoming policy meeting, where officials will judge whether the slowdown marks a genuine trend change or a temporary correction after months of supply tension.