Good morning and welcome to Europe Express.

The eurozone inflation rate is set to dip for the first time since last year, taking the wind out of the sails of monetary hawks who have been sounding the alarm in recent months — even if only temporarily. We will look at what this development means and how long it is likely to last.

With the EU’s rotating presidency about to change hands from Portugal to Slovenia, we thought it would be useful to look at the highlights (and low points) of Lisbon’s management of the bloc’s various policy files. (For trade aficionados, our sister newsletter Trade Secrets looked into the surprisingly influential role presidencies can play for trade deals.)

And in Berlin, we are examining the Social Democrats’ chances of making it into the next coalition government, in the words of their chancellor candidate (and current finance minister) Olaf Scholz.

Bundesbank boss Jens Weidmann this week compared inflation to the Galápagos giant tortoise, which was wrongly classed as extinct for 100 years, writes Martin Arnold in Frankfurt.

After many years of central bankers fretting about inflation being too low, it has been on a bit of a tear in Europe recently, prompting Weidmann and a few others to start pushing for a tightening of the region’s ultra-loose monetary policy.

But that looks set to grind to a halt today, albeit only temporarily, when eurozone inflation figures are expected to fall for the first time in nine months.

Line chart of Eurozone price growth (% year on year) showing Inflation is bouncing back

The projected drop in the harmonised index of consumer prices for the single currency bloc from 2 per cent in May to an expected 1.9 per cent in June reflects a slowdown in the pace of energy price growth from a year ago.

A similar “base effect”, along with a difference in the timing of the Pentecost holiday this year, was blamed by economists for causing German inflation to drop from 2.4 per cent in May to 2.1 per cent in June. Meanwhile, Spanish inflation stabilised at 2.4 per cent.

Most economists expect inflation to resume its upward path later this year, and some are starting to question if the European Central Bank is correct that it will fall back to 1.4 per cent by 2023. “It will become increasingly difficult for the ECB to stick to its benign take on inflation,” said Carsten Brzeski, head of macro research at ING.

Conservative commentators in Germany have long feared excessive inflation and worry that the ECB’s loose monetary policy will cause the cost of living to spiral upwards. The Bundesbank has forecast monthly inflation will hit 4 per cent this year.

“In my estimation, the risks around the price outlook have shifted,” Weidmann said this week, warning of “upside risks to price developments being predominant in the euro area”.

There were further signs of rising inflationary pressure yesterday, when the European Commission said its latest survey of businesses had recorded a fourth consecutive month of increased selling price expectations among companies.

The selling price expectations of retail and industrial businesses hit to a record, while for construction companies it reached a two-decade high and for services climbed to a more than two-year high.

Consumer price expectations rose for the sixth month in a row, but at a much lower level. Meanwhile, the eurozone economic sentiment indicator hit a 21-year high of 117.9 — underlining how the economic outlook is “looking better and better every week”, as commission president Ursula von der Leyen said.

Looking back on the past six months of the Portuguese EU presidency, a rather mixed picture emerges, write Peter Wise in Lisbon and Valentina Pop in Brussels.

On the positive side, Portugal helped see through the ratification of the recovery and resilience fund and related instruments and Portugal itself was the first country to have its national plan approved by the European Commission.

Portuguese diplomats also managed to get EU countries to agree a joint framework for digital travel passes that can include Covid-19 vaccination proof or tests. But countries can still let in travellers inoculated with vaccines that were not approved on the EU market or impose quarantine on those immunised with EU-authorised vaccines because of the Delta variant.

In terms of projects that were already in the pipeline, Portugal sealed the deal on the Common Agricultural Policy and saw through the ratification of the European climate law. Critics, however, pointed out that the climate law was a formality and that the CAP agreement failed to tackle the rather tricky question of greener farming.

A May summit in Porto on social issues, which was much hyped by Portugal, was overshadowed by a US announcement on vaccine patent waivers that blindsided the bloc. However, the following day’s virtual EU-India summit out of Porto was seen as successful, as it marked the launch of trade talks (as the FT reported).

The Porto summitry was not uncontroversial, with the leaders of Germany, the Netherlands and Malta refusing to attend and tuning in virtually, mainly to avoid any bad press about travelling to a scenic location when much of Europe remained under lockdown.

One of the biggest controversies in Portugal over its EU presidency was the government’s decision to take a neutral stance over Hungary’s anti-LGBT+ law. Portugal said it felt obliged to be neutral as the holder of the EU presidency, and made clear that it would sign the open letter denouncing Budapest’s law, already signed by 16 member states, as soon as it hands over the baton to Slovenia.

On this front, domestic criticism was seen as unfair in Brussels.

During the June EU summit, Prime Minister António Costa was among the vocal critics of his Hungarian counterpart.

Portugal and Hungary “do not share the same values. They are diametrically opposed,” Costa said, according to diplomats who witnessed the discussion.

Overall, considering that a majority of meetings had to take place virtually because of the pandemic, the Portuguese presidency made a favourable impression in Brussels. “The Portuguese have steered the ship with a steady hand. Vasco da Gama would have been proud,” said one EU diplomat.

“Given the difficult circumstances, the Portuguese presidency has done really well,” said a second EU diplomat. “They were efficient, professional and definitely much better on the pitch than their national team at the Euro 2020.”

Column chart of Central bankers’ speeches: % mentioning ‘inequality’ or ‘distributional impact/consequences’ showing Central bankers become increasingly ‘woke’ on inequality

Discussions about inequality in the financial sector are growing, with an increasing number of speeches by central bankers broaching the subject. But Martin Wolf writes that while there are ways to make monetary policy help distribute wealth, the reforms needed would be more audacious than most economists expect.

With less than three months to go until Germany’s federal elections, the outlook is not great for the Social Democrats. One recent poll for ZDF-Politbarometer put the party at 14 per cent, far behind the centre-right CDU/CSU at 29 per cent and the Greens at 22, writes Guy Chazan in Berlin.

But Olaf Scholz, finance minister and SPD candidate for chancellor, insisted that current polls are meaningless: most Germans, released only recently from a six-month lockdown and preparing for their summer holidays, are trying to forget about politics.

“The decision on who they’ll vote for will be made mostly in August and September,” he told the Financial Times. And by then, anything could happen. “If you look at the last elections, polls showed a lot of movement up to election day.” (Then-SPD chancellor candidate Martin Schulz enjoyed sky-high poll ratings in the spring, but on election night led the party to its worst results in postwar German history.)

Scholz argued the increasing fragmentation of the German political landscape, with votes spread over six parties, benefited the SPD. “It means that only minor changes in voter behaviour can create completely new constellations,” he said.

Scholz’s strategy is clear: to beat the Greens. That could block a tie-up between the CDU/CSU and the Greens — seen by many as the most likely outcome of September’s election — and pave the way for a “traffic light” coalition between the SPD, Greens and liberal FDP with Scholz as chancellor.

Part of that strategy is based on the hope that, as the election approaches, voters take a much closer look at the candidates — and settle for Scholz as the safest choice. He has also claimed to have a “clear plan” for how to mobilise the huge investments needed to make Germany carbon neutral by 2045.

It is still anyone’s guess whether the approach will pay off.

Experts said the SPD fell between too many stools: Germans who want to fight climate change will vote Green, while those who care more about the post-coronavirus economic recovery will plump for the CDU/CSU.

Scholz, those same experts said, had yet to make a convincing case to voters for why they should back the Social Democrats — a party that, after eight years of propping up Angela Merkel’s government, has something of an identity problem.