German economic sentiment fell at greatest rate since 1998 in June.
German ZEW investor sentiment hits 3-year high in March. Kriss Szkurlatowski/stock.xchn

Economic data from the 17-nation euro zone and the UK released on Tuesday surprised markets as sentiment and inflation beat expectations, but a strong recovery could still be some way off.

Investor sentiment in Germany improved more than expected in June, the Centre for European Economic Research, or ZEW, said on Tuesday. The German ZEW Economic Sentiment index, a survey of approximately 350 economists and analysts regarding the economic future of Germany for the next six months, slightly improved to 38.5 from 36.4, coming in above the expected 38.1.

"The financial experts stick to their assessment: the German economy is likely to pick up speed in the second half of 2013. However, the results of the current survey indicate that the economy will improve rather slowly. Almost half of the survey respondents expect no significant economic impulses in the next six months", ZEW President Clemens Fuest said in a statement.

Meanwhile, the euro area ZEW economic sentiment index, which rates the relative six-month economic outlook for the euro zone, improved to 30.6 in June from April’s 27.6.

In the UK, the consumer price index, or CPI, rose more than expected in May, recovering from a seven-month low recorded in April, according to data released on Tuesday by the Office for National Statistics, or ONS.

CPI in Europe’s third largest economy rose by 0.2 percent month-on-month in May. On an annual basis, inflation increased by 2.7 percent in May, up from 2.4 percent in April, topping Bloomberg’s estimate of a 2.6 percent gain. Core inflation, excluding food and energy, stood at 2.2 percent, up from 2.0 percent in April.

“Inflation is going to continue to pick up in the near term and will peak at around 3 percent,” Philip Rush, an economist at Nomura International Plc in London, told Bloomberg. “The bank is probably a bit optimistic in its forecast for inflation to move down to the target in the medium term.”

A jump in transport prices, and higher clothing and footwear costs were the biggest upward pressures on the headline inflation figure in May. Transport prices rose by 0.4 percent between April and May this year compared to a 0.8 percent decline recorded in the same period last year.

Following the data release, London’s FTSE 100 was up 0.36 percent, Germany's DAX-30 declined 0.30 percent, while France's CAC-40 fell 0.14 percent.