Inflation in the Eurozone has unexpectedly sped up, but economists believe this won’t hinder a further interest rate cut in September. Today’s figures reveal that prices rose by 2.6 percent in July, surpassing the 2.5 percent economists had predicted.
Core inflation, which excludes fluctuating elements like food and energy, remained at 2.9 percent for the third month in a row, despite expectations of a slight slowdown. The rise in the headline rate was primarily due to a sharp increase in energy prices, which climbed 0.9 percent month-on-month, as anticipated by economists.
Services inflation continues to be the most persistent pressure, with prices in the sector increasing by 4.0 percent in the year to July. However, this is a decrease from June’s 4.1 percent, marking the first deceleration in three months.
Rate-setters are closely monitoring developments in services inflation, considered a more accurate measure of domestic price pressures than the headline number. These figures will pose a challenge for rate-setters at the European Central Bank (ECB) as they contemplate whether to reduce rates again in September.
The ECB lowered interest rates for the first time in five years in June, but held rates steady in July due to concerns about ongoing inflation, as reported by City AM.
Policymakers have shown hesitance in providing further guidance on the future trajectory of rates. Christine Lagarde, president of the ECB, stated at the July meeting that the decision for September was “wide open”.
There is one more inflation reading due before the September meeting, which will be pivotal in deciding whether policymakers support another cut.
However, several economists have suggested that July’s figures would not hinder a further cut in September.
“The small fall in services inflation in July is probably just enough for a September rate cut to remain the base case,” said Franziska Palmas, senior Europe economist at Capital Economics.
Analysts at Nomura concurred that the data continues to “support a September ECB rate cut”, noting a slowing momentum in services inflation.
Yet, Peter Vanden Houte, chief eurozone economist at ING, described the decision for September as a “close call” following the recent figures.
“The latest data has not given the ECB the certainty it needs to confirm that the inflation battle has been won,” he commented.
