Euro Zone Inflation Update

FRANKFURT (Reuters) – Euro zone inflation unexpectedly edged up in July, according to data released on Wednesday, although a widely watched gauge of price growth in the services sector eased.

The figures do not seem to derail market expectations for an interest rate cut by the European Central Bank (ECB) in September, but they are likely to reinforce concerns about the challenging final stretch in the ECB’s efforts to lower inflation.

Price growth in the 20 euro-sharing countries accelerated to 2.6% in July from 2.5% in June, according to Eurostat’s flash estimate.

A key measure of underlying price growth, which excludes energy, food, alcohol, and tobacco, did not show the expected decline and remained unchanged at 2.9%.

“It’s a difficult print for the ECB,” said Fabio Balboni, an economist at HSBC. “Disinflation on the goods side is coming to an end and services inflation remains high.”

Despite this, Balboni maintained his prediction for ECB cuts in September and December, a sentiment echoed by investors in euro zone money markets, based on expectations that inflation will eventually ease.

“I still expect a second rate cut to come in September,” said Kyle Chapman, a foreign exchange analyst at Ballinger Group. “I don’t think it matters too much if we get an odd data point that’s slightly stronger than expected.”

Euro zone inflation has significantly declined since briefly reaching double digits in late 2022, driven by a rapid economic reopening post-COVID-19 and rising fuel prices following Russia’s invasion of Ukraine.

However, progress has stalled recently as service sector prices have increased due to higher wages.

In a slight positive development for the ECB, services’ price growth eased to 4.0% from 4.1% in June as an anticipated boost from the Paris Olympics did not materialize, with some consumers resisting perceived price-gouging.

“This kind of pushback bodes well for the medium-term inflation outlook,” economists at ABN-Amro noted in a report.

The ECB has indicated it will not be swayed by individual data points, focusing instead on long-term inflation trends, which it expects to fluctuate around current levels this year before moving towards its 2% target in 2025.

The central bank started cutting rates last month, paused in July, and is widely expected to gradually reduce some of the most aggressive hikes in its 25-year history over the next 1.5 years.