Inflation is expected to remain stable at 2.5% in July, according to FactSet consensus estimates. Core inflation, which excludes volatile food and energy prices, is expected to be 2.8% year-on-year, down from 2.9% in June.
Michael Field of European Markets said, “The inflation rate in the euro area has been hovering around the 2.5% level since February of this year. “Inflation trends are unlikely to move significantly in either direction.” Strategist at Morningstar.
The largest contributor to the euro area annual inflation rate (HICP) in June 2024 was services (+1.84 percentage points, pp), followed by food, alcohol and tobacco (+0.48 points) and non-energy industrial products ( +0.17 points). ) and energy (+0.02 pp).
Why is inflation in the euro area so persistent?
Headline inflation in June was 2.5% year-on-year, in line with the average inflation rate reported since the beginning of the year.
Martin Wahlberg, senior economist at Generali Investments, told Morningstar: “The main reason for the rather slow and volatile process of defusing inflation is the high level of services, which has remained at around 4% year-on-year since November. It’s inflation,” he said.
“However, price increases are now also supported by the summer holiday season, with package holidays and accommodation posting strong price increases in June. We expect these increases to slow again in the coming months.”
With the Paris Olympics in full swing, investors are wondering whether the Olympics will have an impact on inflation through higher prices for hotels, restaurants and taxis. According to a Nomura report released on July 24, the cost of living is unlikely to rise.
“The impact of the Olympics on inflation statistics is likely to be small. Looking back at past Olympics and similar sporting events, official data rarely reflect large shocks to services inflation or other economic variables,” they wrote. I mentioned it in my notes.
What will happen to inflation at the end of the year?
“We expect headline inflation to approach the 2% threshold in the third quarter,” Generali’s Volburg said.
“However, wage growth remains an issue. We expect wage growth to slow on the back of weaker labor market strength and lower inflationary pressures. However, disinflation It remains a messy process and can be easily overshadowed by temporary effects.”
Will the ECB cut interest rates in September?
The European Central Bank kept interest rates unchanged at its July 18 meeting after its first rate cut in June, but markets expect a further cut in September.
“While headline inflation is only 50 basis points above the ECB’s target level, core inflation is once again high, at nearly 3%,” Field added.
“While ECB forecasts suggest it may take until 2026 to reach the magical 2% level, we do not think that will stop the ECB from cutting rates further in the meantime.” The ECB remains at a high level of 3.75%, giving the ECB plenty of room to cut interest rates. ”
Ulrike Kastens, European economist at DWS, said the ECB’s statement on inflation was “balanced”.
“In our view, the ECB is waiting for further indicators, particularly a slowdown in wage growth, which could leave room for further easing of monetary policy restrictions,” he said in a July note. We expect the next rate cut to be in September.” 18.
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