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Euro Zone Inflation Edges up in 'Difficult Print' for ECB

POSTED ON August 1, 2024 •   Business      BY Abiodun Saheed Omodara •   VIEWS 147
A general view of a fruit and vegetable stand on a weekly market in Berlin, Germany, March 14, 2020. l Credit: REUTERS

Euro zone inflation unexpectedly rose in July, although a key measure of underlying price growth remained unchanged. 
The data did not appear to derail market expectations for an ECB interest rate cut in September, but raised concerns about the difficulty in bringing down inflation. 

Services inflation remained high, offsetting disinflation in goods prices. Analysts still expect the ECB to cut rates again in September, despite the slightly stronger-than-expected data.

According to Reuters, price growth in the 20 countries that share the euro accelerated to 2.6% in July from 2.5% in June according to Eurostat's flash estimate.

A key measure of underlying growth in prices -- which excludes energy, food, alcohol and tobacco -- failed to show the expected decline and came in 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."

Still, Balboni stuck to his call for ECB cuts in September and December, as did investors in euro zone money markets, on expectations that inflation would eventually ease.

A general view of a fruit and vegetable stand on a weekly market in Berlin, Germany, March 14, 2020.

"I still expect a second rate cut to come in September," said Kyle Chapman, a foreign exchange markets analyst at Ballinger Group.

"I don’t think it matters too much if we get the odd data point that’s slightly stronger than expected."

Euro zone inflation has fallen a long way since briefly hitting double digits in late 2022, when it had been boosted in large part by a brisker-than-expected reopening of the economy after the COVID-19 pandemic and more expensive fuel in the wake of Russia's invasion of Ukraine.

But that progress has stalled in recent months as prices in the services sector got a boost from higher salaries.

In a small, positive sign for the ECB, services' price growth eased to 4.0% from 4.1% in June as an expected boost from the Olympics in Paris failed to materialise, with some consumers balking at what they saw as price-gouging.

"This kind of pushback bodes well for the medium term inflation outlook," economists at ABN-Amro wrote in a note.

The ECB has made clear it would not be swayed by individual data points and will focus instead on the broader trend for inflation, which it expects to bounce around current levels this year before pulling back towards its 2% target in 2025.

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