The inflation rate in the Eurozone has unexpectedly increased in July, reaching 2.6% compared to the same month last year, according to a preliminary estimate by Eurostat. This rise surpasses the predictions of economists surveyed by Reuters, who had expected the inflation rate to remain at June’s level of 2.5%.
Sector-wide price increases
Core inflation, which excludes the volatile prices of energy, food, alcohol, and tobacco, remained steady at 2.9% from the previous month. The European Central Bank (ECB) closely monitors this measure as it reflects underlying price trends. Service prices, another focus for the ECB, rose by 4.0%, slightly down from 4.1% in June. Energy prices increased by 1.3% after a modest 0.2% rise in June. Prices for food, alcohol, and tobacco grew by 2.3%, down from 2.4% in June, while non-energy industrial goods saw a price increase of 0.8%, up from 0.7% in June.
ECB’s 2% inflation target slipping away
The goal of achieving a 2% inflation rate seems further out of reach with the latest figures. Thomas Glitzel, Chief Economist at VP-Bank, commented that the ECB’s September meeting will be challenging. He pointed out that underlying inflation appears to be stabilizing around 3%, significantly above the ECB’s target. Jörg Krämer, Chief Economist at Commerzbank, also noted that this should be considered by those advocating for further rate cuts in September, rather than focusing on a temporary drop in the inflation rate expected in August due to a base effect.
Alexander Krüger, Chief Economist at Hauck Aufhäuser Lampe, believes the ECB will still take action: “Even if this is just an interlude, a longer phase of quasi-price stability is on the horizon. In this context, the ECB may not see the need for a strictly restrictive course. The inflation result for July supports cautious rate cuts rather than a pause in September.”
In early June, the ECB cut interest rates for the first time since 2019, reducing the key deposit rate from 4.00% to 3.75%. However, they paused further rate changes at their July meeting.
