Headline inflation in the euro zone unexpectedly rose to 2.6% in July, as reported by the European Union’s statistics agency on Wednesday. This increase occurred despite a slight easing in price growth within the services sector. In June, inflation had slightly decreased to 2.5% from May’s 2.6%. Economists surveyed by Reuters had anticipated that the headline figure for July would remain unchanged at 2.5% from June.
Core inflation, excluding volatile energy, food, alcohol, and tobacco prices, reached 2.9% in July, surpassing Reuters’ estimate of 2.8%. This figure was the same as the core print in June. The services inflation rate, closely monitored, was 4% in July, a decrease from June’s 4.1%.
Harmonized inflation increased slightly in several key euro zone countries, including Germany and France. Both countries saw inflation rise from 2.5% in June to 2.6% in July. These inflation rates were released following the euro zone’s second-quarter gross domestic product data, which showed a 0.3% growth in the three months leading up to June, exceeding economists’ expectations of 0.2%. Despite a 0.1% contraction in Germany, the euro zone’s largest economy, the overall growth was positive.
Investors will now assess how this new data might influence the European Central Bank’s future decisions on potential interest rate cuts. The ECB maintained rates in its recent meeting after a reduction in June, leaving open the possibility of another cut in September. The ECB Governing Council emphasized that it would consider inflation dynamics, monetary policy transmission strength, and not commit to a specific rate path.
Julien Lafargue, chief market strategist at Barclays Private Bank, stated that the latest inflation figures are unlikely to significantly alter the interest rate outlook. He noted that despite higher-than-expected headline inflation, economic growth remains subdued, including the Q2 GDP data, which could help keep inflation on a downward trend. Lafargue suggested that the ECB might still proceed with interest rate cuts in September.
